Selling Partnership Interest With Negative Capital Account In Houston
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FAQ
If a partner or group of partners disposes of their partnership interests they can not defer their income tax liabilities by completing a 1031 Exchange because interests in a partnership are personal property interests and can not be exchanged for an interest in real property.
The best way to sell your limited partnership interest may lie in finding an experienced broker or advisor who can help you to identify potential buyers and guide you through any negotiations that may arise.
A sale of a partnership interest occurs when one partner sells their ownership interest to another person or entity. The partnership is generally not involved in the transaction. However, the buyer and seller will notify the partnership of the transaction.
A DRO requires a partner to restore any negative balance (deficit) in their capital account upon the liquidation of the partnership. The DRO demonstrates the partner's willingness to assume the economic risk of loss in the partnership.
This means the ownership interest a partner has in a partnership is treated as a separate asset that can be purchased and sold.
If any members of a partnership have a negative capital account, that partner is legally obligated to restore their deficit, also known as a DRO (deficit restoration obligation).
The partner with a deficit contributes enough assets to offset the deficit balance. The deficit balance is removed from the accounting records with only the remaining partners sharing in future gains and losses. The other partners file a legal suit against the partner with the deficit balance.
If a partnership holds IRC 751(a) property at the time of the sale, the partner recognizes gain or loss from its share of IRC 751(a) assets. The ordinary gain or loss is subtracted from the total gain or loss. The result is the partner's capital gain or loss from the sale.
