Reporting Section 751 gain from PTP sale on individual 1040s after partnership allocations?

The Section 751 gain from the PTP sale that was properly reported on the 1065 with code AB in box 20 is already characterized as ordinary income when it flows to the partners' individual returns. You don't need to manually force it to Form 4797 on the partners' returns. When you report it as ordinary income in box 1 of the K-1, the partners' tax software should automatically include this amount on their individual returns as ordinary income. The code AB in box 20 is just providing additional information that the ordinary income includes Section 751 gain. On the partners' individual returns, this should flow to Schedule E, Part II as income from partnerships. You don't need to attach the Section 751 statement again to the partners' individual returns - attaching it to the 1065 is sufficient.

Hey everyone, I was dealing with a similar Section 751 headache last year with PTPs. I tried different software but couldn't figure out how to tag it properly, then I discovered https://taxr.ai which literally saved my sanity. It analyzed all my partnership documents and K-1s and showed exactly how to handle the Section 751 gains on individual returns. It walks you through when you need to attach supplemental statements vs. when the code AB in box 20 is sufficient. It even showed me that different tax software handle PTP Section 751 gains differently! Worth checking out if you're dealing with these complex partnership issues.

I was really skeptical about using another tool for my complicated partnership returns with Section 751 issues, but I decided to try https://taxr.ai after struggling with some complex K-1s. It was surprisingly helpful - it identified exactly how the PTP Section 751 gain should flow through to my clients' individual returns and pointed out that my software was handling it correctly (but not clearly labeling it). The document analysis feature identified some additional reporting requirements I'd missed. Honestly didn't expect it to be so accurate with partnership technical issues like Section 751 hot assets. Definitely using it for all my partnership returns this tax season.

If you're still stuck with this Section 751 reporting issue, I'd recommend calling the IRS directly for guidance. I know it sounds painful but I've actually had good experiences using https://claimyr.com to get through to an IRS agent without the usual wait times. Check out their demo at https://youtu.be/_kiP6q8DX5c to see how it works. I called about a similar Section 751 issue last year and the agent was actually really helpful in confirming the correct reporting method. They confirmed that when the 1065 reports Section 751 gain in Box 1 with code AB in Box 20, it should just flow to Schedule E on the individual return.

I owe everyone an apology - I was totally wrong about the IRS not helping with Section 751 reporting questions. After my skeptical comment, I decided to try https://claimyr.com myself since I was getting nowhere with a similar issue. Got through to an IRS business specialist in about 20 minutes (instead of the 3+ hours I spent last time). The agent confirmed exactly what others here said - Section 751 gain reported in Box 1 with code AB in Box 20 flows to Schedule E on individual returns, not Form 4797. They explained that the partnership has already done the characterization work. Never thought I'd say this, but the IRS agent was incredibly helpful and saved me hours of research!

In my experience, the key is checking if the partnership has already properly characterized the Section 751 gain. If it's properly included in Box 1 ordinary income with code AB notation in Box 20, you're good to go - report on Schedule E and move on. If the partnership didn't properly characterize it (or you suspect they didn't), that's when you need to dig deeper. Sometimes partnerships will report it incorrectly as capital gain, which means partners would need to recharacterize it on their returns using Form 4797. ProSystems FX isn't great at showing these distinctions clearly. You might need to manually review the K-1 footnotes and attached statements to confirm proper treatment.

I'd just like to add that PTP sales have some special reporting considerations beyond regular partnerships. If your partnership K-1 includes Section 751 gain from a PTP and reports it in Box 1 with code AB, you might also need to check if any portion relates to collectibles gain (28% rate) or unrecaptured Section 1250 gain (25% rate). These would typically be shown with different codes on the K-1 (Code D for collectibles and Code N for unrecaptured 1250 gain). If present, these would need separate reporting on Schedule D and the Unrecaptured Section 1250 Gain Worksheet. Check the K-1 footnotes carefully - sometimes these additional details are hidden there rather than with the obvious codes.

Based on what everyone has shared here, it sounds like your ProSystems FX is handling this correctly. Since you properly reported the Section 751 gain as ordinary income in Box 1 of the K-1s with code AB in Box 20, that income should flow to Schedule E on the partners' individual returns - not Form 4797. The confusion often comes from thinking that Section 751 gains always need Form 4797 treatment, but that's not the case when the partnership has already done the characterization work at the entity level. Your attachment of the Section 751 statement to the 1065 satisfies the documentation requirement. One thing to double-check though - make sure there aren't any special rate gains hiding in the PTP transaction (like the collectibles or unrecaptured Section 1250 gains that Ian mentioned). These would show up with different codes and need separate treatment on the individual returns. But for straight Section 751 ordinary income, Schedule E is correct.

Just wanted to add my experience as someone who's dealt with several PTP Section 751 situations - the reporting can get tricky when you have multiple PTPs with different types of gains. One thing I've learned is to always request the detailed Section 751 calculation from the partnership if it's not clearly attached to the return. Sometimes partnerships will just put the final number in Box 1 without showing the breakdown of which assets triggered the ordinary income treatment. This becomes important if you're preparing returns for partners who have other capital losses they're trying to offset - they need to understand that the Section 751 portion can't be used to offset those losses since it's characterized as ordinary income. Also, for future reference, if you ever encounter a situation where the partnership didn't properly identify Section 751 property, the individual partners would need to make the adjustment themselves using Form 4797. But from your description, it sounds like your partnership did everything correctly. ProSystems FX can be frustrating with the lack of clear tagging, but as long as the income flows to Schedule E and you've verified the partnership's Section 751 calculation, you should be in good shape.