Question re: return of capital vs capital gain in a partnership

[Lisa99]

DH and I are in a REIT private partnership that is now closing out.

We received our first check today from the partnership close out and I'm a bit confused by the annual report that accompanied the check.

Using hypothetical numbers here is what occurred:

1. We put $50k into the partnership in after tax dollars (the money isn't in an IRA).
2. The $50k is now worth $75k.
3. We received a check for $35k along with a letter from the partnership saying that this check represented the largest capital gains that we'd have. Next year we would receive a check as well but the capital gains would be less.

My question: is capital gains on a K-1 partnership front loaded? Meaning that $25k of the $35 is all capital gains rather than a return of capital?

When we sell Vanguard shares we only pay capital gains on the gains so I want to make sure I understand why any of the $35k would be subject to capital gains since our principal hasn't been fully returned yet.

[phil1ben]

My guess is that this is a limited liability company or limited partnership that held one or more parcels of real estate. Normally the Operating Agreement or Limited Partnership Agreement will contain Sections called "Distributions" and "Dissolution". Those sections will often identify the allocation of distributions both periodically and upon dissolution (which is the same thing as "closing out"). At times they are left to the discretion of the Managing Member or General Partner. In any event, the K-1 should identify the allocation of the payment you received.

[Lisa99]

Thanks Phil. I'll take a look at the K-1 again.

We have someone do our taxes so if I still don't understand it I'll give him a call.

[kaneohe]

Quote:

Originally Posted by Lisa99 When we sell Vanguard shares we only pay capital gains on the gains so I want to make sure I understand why any of the $35k would be subject to capital gains since our principal hasn't been fully returned yet.

Suppose you buy 100 sh worth 50K. The shares then appreciate to 75K.
You sell enough to realize 37.5K. How much, if any, is taxable? You have not yet received back your investment of 50K.

[Texas Proud]

It is late and my cat does not want me to type... so I will be brief....


A capital gain distribution means that the partnership created this gain with something they sold... they are distributing this to you...

A return of capital is when they send you a check but do not have any income...

The price you paid for the shares has nothing to do with the current basis.... (cat left, so I will press on).... each year the partnership earns money and makes distribution... you basis is (check this out as I have not done this in a LONG time)

Original price paid (initial capital)

plus any income allocated to you on your K-1
minus any expense allocated that are not part of income (if you can deduct)
minus any cash received from the partnership...


So, say you paid 50 for the shares... K-1 showed 15 of income and they sent you a check for 10... your new basis is 50+15-10 or 55...