Liquidating trust and tax

Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect.As a result, the tax effects of a partnership that makes liquidating distributions only impacts the partners who receive them.To be taxed as a liquidating distribution, however, a partner's interest in the partnership must terminate.At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the distributed money came from principal versus interest.The K-1 is the form that lets the beneficiary know his tax liability from trust distributions.The K-1 schedule for taxing distributed amounts is generated by the trust and handed over to the IRS.The IRS, in turn, delivers the document to the beneficiary to pay the tax.

Initially, your basis is equal to the amount of cash plus your basis -- or cost -- in any property contributed to the business.Upon liquidation of a partnership, the Internal Revenue Service views the distributions as a sale of a partnership interest; as a result, gains are generally taxed as long-term capital gains to partners.Therefore, partners who have held an interest in the partnership for more than one year as of the date of a liquidating distribution will pay lower rates of tax on the gain than they do on a partnership's operating profit.Regardless of the amount of cash you receive, your basis in the distributed property is never less than zero.If your basis is zero, this means the amount you eventually sell the property for is all taxable gain.

Leave a Reply