Hi, I would appreciate help with the tax ramifications for a Partners Profits in a Limited Partnership?
Let's assume that the partner contributes (a NYSE traded) stock that he purchased for $1,000 which I believe means that his cost basis in the LP is $1,000.
Now let’s say the stock appreciates over the time and it is worth $10,000, and the Limited Partnership sells the stock for $10,000.
The CapGain on the sale would be $9,000 (sale price - purchase price) and since the Partners cost basis is $1,000, I believe that he can withdraw (his cost basis) $1,000.
But the LP has a profit of $9K (sales price - original $1,000 = $9,000 profit/income), that will be calculated on Form 1065 and “passed-through” to his Form 1040 via the K-1 and he will pay CapGains tax of the $9,000 profit.
So in essence, he will need to pay CapGain tax on $9,000 but he can only withdraw $1,000 (which is the balance of his cost basis in the LP)?
What happened to the $9,000 that is the LP has as a profit?
Does he every have access to the $9,000?
I’m afraid to ask because you might tell me if he withdraw the $9,000, he will have to pay Ordinary Income tax on the $9,000 or DOUBLE TAXATION.
I would appreciate if you can help me understand the tax ramifications of this scenario.
Thank you for your help,
Bob