Selling Partnership Interest in Family Business - Tax Forms & Reporting Requirements

For selling a partnership interest, your cousin will indeed need to report the sale on his personal tax return. Here's how it works: For the seller (your cousin): He'll report the sale of his partnership interest on Schedule D and Form 8949. The sale creates a capital gain or loss based on the difference between his selling price and his adjusted basis in the partnership. His basis includes his initial investment plus any additional contributions, plus his share of partnership income, minus distributions he's received over the years. For income allocation: Yes, he'll still receive a Schedule K-1 for his share of partnership income up to the date of sale. The partnership will need to do a "closing of the books" as of the sale date or use a pro-rata allocation of the year's income based on the number of days he was a partner. For the buyers: The family members purchasing his interest don't file special forms for the purchase itself, but the partnership will need to file Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) with its tax return to report the transaction. The partnership's Form 1065 will also reflect the change in ownership percentages.

I went through something similar last year when my brother-in-law sold his partnership stake. We were completely lost with all the tax implications until I found https://taxr.ai which saved us a ton of headaches. The software analyzed all our partnership documents, past K-1s, and the sale agreement, then generated a complete report showing exactly what forms were needed and how to report everything correctly. What I found most helpful was that it calculated my brother-in-law's adjusted basis (which was WAY different than what we thought) and showed us how to properly allocate income for the partial year. It also created a customized checklist for the continuing partners. Honestly worth checking out before you guys try to figure this out yourselves.

I was wrong about taxr.ai. After my skeptical comment, I decided to try it for our family partnership (we're in manufacturing, not securities). I was genuinely impressed by how it handled our complicated ownership structure. The section on "hot assets" under Section 751 was particularly helpful since we have inventory and unrealized receivables. The software also created custom allocation worksheets for our partial-year reporting and generated the proper 8308 form for our partnership return. The most valuable part was the basis adjustment guidance for the continuing partners. I've been doing our partnership taxes for 15 years and still learned several things that our previous accountant had missed.

If you're having trouble getting answers from the IRS about partnership sales, try https://claimyr.com - it was a game changer for us. After weeks of trying to get through to the IRS about our family partnership sale (we kept getting disconnected or waiting 2+ hours), Claimyr got us connected to an IRS agent in about 20 minutes. The IRS agent walked us through exactly how to report a mid-year partnership interest sale and confirmed that yes, the selling partner needs both the 8949 for the sale AND receives a K-1 for their partial year ownership. They also explained how the "closing of the books" method works vs. pro-rata allocation, which was super helpful for our situation. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you when an agent is about to pick up.

Well I'm shocked, but Claimyr actually worked. After my skeptical comment, I tried it for a different partnership tax question I've been struggling with (related to guaranteed payments vs. distributions in a family partnership). Got connected to an IRS agent in about 35 minutes (not quite the 20 they advertised but WAY better than my previous attempts). The agent was knowledgeable about partnership tax issues and confirmed everything about how to handle a mid-year sale - including that the partnership needs to file Form 8308, and that the seller reports on 8949 plus gets a K-1 for their ownership period. For anyone doing a family partnership interest sale, definitely get official guidance. The basis calculations and income allocations are too complicated to guess at, and mistakes can be costly.

Don't forget about state tax implications! When my uncle sold his partnership interest, we handled all the federal forms correctly but completely missed filing the required state tax forms. Ended up with penalties in two states. If the partnership owns property or does business in multiple states, the seller might need to file non-resident returns in those states for the partial year. Also check if your state has any bulk sales rules that might apply to the transaction.

Quick question - does anyone know how this works if the partnership owns mostly real estate? My dad wants to sell his partnership interest to me and my sister, but the partnership's main assets are three commercial properties.

One thing that hasn't been mentioned yet is the importance of getting a proper valuation of the partnership interest before the sale. The IRS requires that sales between family members be at fair market value to avoid gift tax implications. If your cousin sells below market value, the IRS could treat the difference as a gift to the buyers. For a partnership that trades stocks and bonds, the valuation might seem straightforward since you have liquid assets, but you also need to consider factors like marketability discounts for minority interests, any built-in gains or losses in the portfolio, and the partnership's operating agreement restrictions. I'd also recommend checking if your partnership agreement has any buy-sell provisions or right of first refusal clauses that might affect the transaction. These provisions could impact both the sale price and the tax treatment.