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A partner contributed appreciated property to Ridgeline in 2022 and the fund sold it in 2025. How do we allocate the built-in gain on the 1065 and report it on the K-1s?
KnowledgeRead 6 sources · 14s
The built-in gain goes back to the partner who contributed the property. Section 704(c) requires gain on contributed property to account for the difference between its basis and its value at contribution.1
Ridgeline’s agreement uses the traditional method, so $1.9M of the $4.8M gain on the 2025 sale is allocated to Harbor Point LP. The remaining $2.9M follows the Class A percentages.256
Report the sale on Form 4797 and carry it to Schedule K line 10 as net Section 1231 gain. On Harbor Point’s K-1, Item N shows $1.9M of net unrecognized Section 704(c) gain at the start of the year and zero at the end.34
The ceiling rule does not bind, because the tax gain on the sale covers the full built-in amount.2
Not found in your sources. Nothing addresses the Harbor Point side letter. A. Morgan should confirm it does not override Section 4.2.
Sources
- 1IRC Section 704(c)(1)(A)Statute · uscode.house.gov
- 2Treas. Reg. Section 1.704-3(b) · Traditional methodRegulation · ecfr.gov
- 3Instructions for Form 1065 (2025) · Sch. K line 10IRS guidance · irs.gov
- 4Partner’s Instructions for Schedule K-1 · Item NIRS guidance · irs.gov
- 5Ridgeline LPA · Section 4.2 AllocationsFirm vault · Ridgeline binder
- 6Section 704(c) layers 2025.xlsxFirm vault · Workpapers
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2Treas. Reg. Section 1.704-3(b)ecfr.gov
(b) Traditional method
(1) In general. The traditional method requires that when the partnership has income, gain, loss, or deduction attributable to section 704(c) property, it must make appropriate allocations to the partners to avoid shifting the tax consequences of the built-in gain or loss.
(i) Limitation on allocations. The total income, gain, loss, or deduction allocated to the partners for a taxable year with respect to a property cannot exceed the total partnership income, gain, loss, or deduction with respect to that property for the taxable year (the ceiling rule).
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