“Shutting Down a Partnership:
The Tax Implications”
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When you start a partnership there’s plenty of good fellowship to go around.
But things change for many reasons, and there may come a day when you want to shut down your partnership.
If that day comes, it’s important to understand the tax implications of your decision to call your partnership a day.
- Scenario 1. One partner buys out the other partner(s) for cash and continues to operate the business or investment activity.
[NOTE: The exiting partner will have a taxable gain or loss from selling his or her partnership interests. As a general rule, the gain from selling a partnership interest is treated as a capital gain. The lower long-term capital gains tax rates apply if the partnership interest has been owned for more than one year.]
- Scenario 2. You and the other partners decide to liquidate the partnership by selling all of its assets for cash and distributing the cash to the partners.
[NOTE: The partnership recognizes taxable gains and/or losses from selling its assets. You will receive a Schedule K-1 from the partnership that shows your share of the passed-through gains and/or losses. Report them on your Form 1040. Ditto for the other partners.}
- Scenario 3. You and the other partners decide to liquidate the partnership by distributing all of the partnership’s existing assets to the partners.
[NOTE: If cash distributed to you in the liquidating distribution (including certain marketable securities that are treated as cash) exceeds the tax basis of your partnership interest immediately before the distribution, you will have a taxable capital gain equal to the difference]
As you can see, this subject gets highly technical fast, which is why you should consult a tax professional before you make any moves. For a good place to start…
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“Shutting Down a Partnership:
The Tax Implications”