Thanks, ahead of time.
I can almost recall that cost basis is involved. And if I sell shares, I'd be liable for tax on the passive income (profit.) And one of you spelled out for me previously that it is wise to simply NEVER SELL, and just let my wife inherit the whole kit-and-kaboodle. She will inherit at a stepped-up cost basis.
So, at what point, under what circumstances must I start paying taxes on my profit? (Haven't, yet.)
Comments
Your Schedule K-1 is where all pass-through items show up.
Federal Income Tax on Distributive Share
Your share of the LP’s profits and losses “pass through” to you each year, even if no cash is distributed. You’ll owe ordinary income tax on your distributive share of business income and capital gains at your individual rates.
Reporting and Forms
Each year the partnership files Form 1065 and issues you a Schedule K-1. You report the K-1 items—ordinary income, interest, rental income, capital gains, etc.—on Schedule E of Form 1040 and pay any tax due with your return.
Self-Employment Tax
If you’re a general partner, you’ll owe self-employment tax on your share of ordinary business income. Limited partners generally avoid SE tax on distributions unless they receive guaranteed payments for services or materially participate beyond the “limited partner” rules.
Estimated Tax Payments
Because LP distributions typically have no withholding, you’ll need to make quarterly estimated tax payments to the IRS and state authorities. Underpaying can trigger penalties and interest, so use last year’s tax or the safe-harbor methods to calculate your installments.
State and Local Income Taxes
If the LP operates in multiple states, you may have to file returns and pay income tax where the partnership has nexus. Some states impose entity-level taxes or fees in addition to personal income tax on your distributive share.
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Other Annual Considerations
- Passive activity loss limitations may restrict deductions if you don’t materially participate; unused losses carry forward.
- Net Investment Income Tax (3.8%) can apply to capital gains, interest, and certain rental income above AGI thresholds.
- Alternative Minimum Tax preferences can be triggered by partnership items.
Tracking Basis:
Basis and At-Risk Limitations
Initial Basis: Cash or property you contributed.
Adjustments:
Increase by your share of income and additional contributions.
Decrease by distributions and your share of losses.
Loss Deductions: Limited to the lesser of your basis or “at-risk” amount (usually equal to basis for LPs)
https://accountinginsights.org/the-taxation-of-a-limited-partnership/
https://www.upcounsel.com/limited-partnership-tax-return