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Author: ThePhebus Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 7258  
Subject: Capital Gain with no Equity Sale? Date: 11/24/2008 6:03 PM
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My investment club has our own software that we use to keep track of everyone's ownership that takes into account everything it needs to. Or so we thought.

Example:
10 members create a Partnership and all contribute $100/month for 12 months starting on January 1. One member decides to leave on December 31. The Partnership has invested 75% of their cash and lost (unrealized) 50% on that investment, but has not sold anything. There is $3000 cash and $4500 of equity. All members have equal ownership so everyone has an account value of $750.

When one member leaves he will have contributed $1,200 but get $750 when he cashes out. How does this $450 show up on his taxes? In a Partnership structure the gain/loss, dividends, interest, etc. pass straight through to the Partners but in my example there was no realized gain or loss of any sort.

I talked with someone casually who said this $450 would be a personal income loss for the Partner and not a capital loss. I can see how it wouldn't count as a capital loss for the departing member, but under that logic it seems to me that if the investments are now sold at a loss after the Partner leaves the remaining members benefit. If the day after the Partner leaves the Partnership sells all of their equities the capital loss would be $4,500 but that would now be split amongst 9 members instead of 10 so they would get a $500 capital loss.

The first partner to leave gets no capital loss and the remaining partners only loss $450 but get to claim a capital loss of $500??

This may be a very good reason to get some professional accounting software, but it wouldn't necessarily answer this queury.

Anyone has a hint, tip, or direction to point me in? Best regards to everyone.
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