Buy out

[cozmopak]

If I pay for a buy-in into my practice with post-tax dollars, will I be taxed on the buy out?

[jfoxcpacfp]

cozmopak wrote:

If I pay for a buy-in into my practice with post-tax dollars, will I be taxed on the buy out?

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The amount you pay will give you "basis", which will reduce any gain if you ever sell.

[Baseballmom94]

Great question and we are in this exact situation with being bought out of a partnership in 2016.

Johanna, what paperwork is needed to prove the original buy-in price/basis to the IRS? I'm hoping my husband kept a copy of his original paperwork/check.

[cozmopak]

So am I guaranteed to get back what I bought into, and pay capital gain tax on anything over that amount if there is gain?

[jfoxcpacfp]

Baseballmom94 wrote:

Great question and we are in this exact situation with being bought out of a partnership in 2016.

Johanna, what paperwork is needed to prove the original buy-in price/basis to the IRS? I’m hoping my husband kept a copy of his original paperwork/check.

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It depends. If you paid the partnership for the original buy-in, it will show with the K1 that you get when the form 1065 is filed. If the partnership is organized as an S-corporation, you are responsible for tracking the basis from year to year, but your CPA should have been handling that for you. Check with her. Be sure to report "outside" basis (amounts paid to a 3rd party) along with "inside" basis (basis built up through income taxed to you over the years).

[jfoxcpacfp]

cozmopak wrote:

So am I guaranteed to get back what I bought into, and pay capital gain tax on anything over that amount if there is gain?

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You're never guaranteed to get your money back unless the contract says so. What you originally pay is only part of the basis. Each year, your basis will be increased or decreased by partnership results. For example, if the partnership is profitable this year and you report part of that profit on your income tax return, your basis will be increased by that much. The calculation is different for an s-corporation than it is for a partnership. This is something to discuss with your CPA; do not do this on your own.

[cozmopak]

But for a given year, if you buy out and all you get back is your basis, are you taxed on the basis?

[jfoxcpacfp]

cozmopak wrote:

But for a given year, if you buy out and all you get back is your basis, are you taxed on the basis?

Click to expand...

If you sell out and all you get back is your basis then, no, you are not taxed on the return of basis.