A departing partner who receives a series of liquidation distributions does not recognise gain until the partnership interest's whole basis is regained. Similarly, a loss on a series of liquidation distributions is not recorded until the retiring partner gets the last liquidating payment in the following year. When a retiring partner is receiving a defined amount of liquidation payments over a number of years, however, a particular option is available. The retiring partner may choose to declare gain or loss ratably as each liquidation payout is received in this situation. If the partner makes the election, each liquidation payment is offset by a substantial share of the partner's basis in the partnership interest.
For Example : Jones, leaves the ABC alliance. In exchange for his investment in partnership property, he will get $300,000 from the partnership over three years. His partnership interest is valued at $180,000. Thus, a return of basis accounts for 60% of the total ($180,000 divided by $300,000) and capital gain accounts for 40% of the total. (Any inventory that has significantly increased in value will be taxed as regular income.)
As a result, if he does not win the election, he will not be able to claim any gains in 2018. He would have a $60,000 capital gain in 2019 and another $60,000 in 2020. If he wins the election, he will have a capital gain of $36,000 ($40 percent of $90,000), $60,000 ($40 percent of $150,000), and $24,000 ($40 percent of $60,000) in 2018, 2019 and 2020.
In general, you would not vote and instead withhold realisation of benefit for as long as feasible. You get what amounts to an interest-free loan from government in the amount of the delayed tax by delaying. However, there are times when it is preferable to speed your progress.
If you have already realised a loss from another transaction, for example, you might wish to make the election so that you can utilise the loss to offset the gain right now. Furthermore, the traditional deferral strategy may result in a larger loss if tax advantages are eliminated as adjusted gross income rises. The election might stretch out gains, reducing the likelihood of these tax incentives being lost.
What if your business is being sold at a loss? In such instance, you might wish to choose to accelerate the recognition of your loss so that you can utilise it to offset profits from subsequent transactions more rapidly.
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