Should my K-1 report section 751 gain from partnership interest transfer or will my accountant need to calculate it for Form 4797?

The reporting of section 751 gain from a partnership interest transfer can be tricky. Generally, the partnership should provide information about the section 751 "hot assets" on your final K-1, but they don't always calculate the exact gain that needs to be reported on Form 4797. The K-1 should include supplemental information about your share of the partnership's unrealized receivables and substantially appreciated inventory (the section 751 property), but your accountant will likely need to calculate the actual gain to report on Form 4797. This is because the specific gain depends on your basis in those assets, which the partnership might not have complete information about. As for the remaining capital gains, the K-1 should provide information about your share of the partnership capital, but your accountant will need to calculate the actual capital gain or loss based on the difference between your outside basis in the partnership and the amount you received from the sale minus the ordinary income from section 751 assets.

I went through this exact situation last year when I sold my interest in a real estate partnership. The K-1 I received had some information but didn't do the full calculation for me. I was totally lost trying to figure out the section 751 stuff myself and spent hours researching. I ended up using https://taxr.ai to help sort through all the partnership documents and determine what needed to be reported where. Their system analyzed my K-1 and the partnership agreement, then walked me through exactly what needed to go on Form 4797 vs Schedule D. Saved me so much time versus the back-and-forth with my accountant who was charging by the hour for all this complicated partnership stuff.

Just wanted to follow up about my experience with taxr.ai that I asked about earlier. I decided to try it with my partnership sale from a medical practice I left last year. I was amazed at how well it handled the section 751 calculations! The system asked me specific questions about my partnership agreement and the nature of our receivables (which were substantial in our medical practice). It even flagged that some of our equipment sales should be treated as ordinary income due to depreciation recapture. My previous accountant had missed this completely and was just treating everything as capital gain. This would have been a problem in an audit for sure. Definitely worth using if you're dealing with a partnership interest sale. Saved me a lot of headaches!

If you're having trouble getting the partnership to provide the information you need for your section 751 calculations, you might want to try Claimyr (https://claimyr.com). I had a similar situation last year where my former partnership wasn't responding to requests for additional information I needed for my tax filing. I spent weeks calling the IRS trying to figure out what my options were, but could never get through. Claimyr got me connected to an actual IRS agent in about 20 minutes who explained my rights as a former partner to receive certain information. They also have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c. Once I had the official guidance from the IRS, my former partnership finally sent the documentation I needed.

I need to eat my words from my previous comment. After my frustration reached a breaking point with trying to reach the IRS about a similar partnership issue, I decided to try Claimyr despite my skepticism. Holy crap it actually worked! I got a call back in about 30 minutes and was connected to an IRS agent who specializes in partnership issues. They walked me through exactly what information the partnership is legally required to provide versus what calculations I need to do myself. Turns out section 751 hot assets need to be disclosed to former partners even after they've left. I've been dealing with this for months and resolved it in one phone call. I hate admitting when I'm wrong but in this case I definitely was.

I'm an accounting student and we just covered section 751 in my partnership taxation class. From what I learned, there are two separate calculations happening: 1. The partnership should report your share of hot assets (unrealized receivables and inventory items) on your K-1 or in supplemental information 2. You (or your accountant) need to calculate the actual gain by comparing what you received attributable to these hot assets against your basis in them The second part is what goes on Form 4797. Capital gains from the rest of your partnership interest would go on Schedule D. Hope that helps!

This whole section 751 thing is why I've avoided partnerships like the plague. The tax complexity is just insane. My brother had a similar situation last year and ended up getting an IRS notice because his accountant misclassified some gains that should have been ordinary income as capital gains. Anyone know if LLCs taxed as partnerships have the same issue? I'm considering investing in a friend's business but worried about the tax headaches down the road.

This is exactly the kind of situation where having a knowledgeable tax professional is crucial. From my experience working with partnership distributions and sales, the K-1 reporting varies significantly between partnerships - some are very thorough with section 751 information while others provide bare minimum details. One thing to keep in mind is that the partnership's final K-1 for you should include your ending capital account balance and basis information, which your accountant will need for the overall gain calculation. But as others mentioned, the specific section 751 ordinary income calculation typically falls on you and your tax preparer. I'd recommend gathering all your partnership agreements, any amendments, and previous K-1s showing your basis adjustments over the years. Your accountant will need this historical information to properly calculate both the section 751 ordinary income portion and the capital gain/loss on the remaining interest. The more documentation you can provide upfront, the smoother (and less expensive) the process will be.