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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 7258  
Subject: Re: Capital Gain with no Equity Sale? Date: 11/24/2008 6:17 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.


Well, now you have a good argument for getting some professional investment club accounting software. The cost is not exhorbitant, check out the offerings at iclub.com and bivio.com.

To answer your specific question, the withdrawing member has a capital loss, but not necessarily the $450 you would expect. In addition to the $1200 of capital he contributed directly to the club, his tax basis includes his share of the income and expenses of the club. Income increases his cost basis and expenses reduce his cost basis. The difference between what he receives when he withdraws from the club and his adjusted tax basis is a capital gain or loss. It is short-term or long-term based on the length of time between the date he joined the club and the date he receives his withdrawal payment. The capital gain or loss is entered on line 1 or 8 of Schedule D as "disposition of interest in XYZ partnership" with the appropriate dates and amounts.

Continuing with your example of the club selling the stock one day later... each remaining member gets to claim a $500 capital loss which flows through to them on their K-1. But, and this is key, their tax basis is reduced by $500. If this were the only transaction the club had, each member would now have $750 in value, with a tax basis of $700 ($1200 contributed less $500 capital loss). If each were to withdraw now, each would report a $50 gain from the disposition of their partnership interest. A $500 loss and a $50 gain provide a net loss of $450. So, the only difference among the partners is the relative timing of various parts of the transaction.

I hope this helps. If you have further questions, just ask.

(You might also want to check out biwiki.editme.com).

Ira
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