What Is Schedule D (Form 1065) for a Partnership?
Understand how a partnership uses Schedule D (Form 1065) to calculate capital gains and losses from asset sales for allocation to its partners.
Schedule D for Form 1065, “Capital Gains and Losses,” is an Internal Revenue Service (IRS) form used by partnerships to report the outcomes from the sale or exchange of capital assets. It provides a standardized way to calculate these transactions for the partnership’s annual tax return, Form 1065. This schedule separates transactions into short-term and long-term categories based on how long the partnership held the asset. The resulting net gains or losses are then passed through to the individual partners, as partnerships do not pay income tax.
Transactions Reported on Schedule D
Schedule D is exclusively for reporting the sale or disposition of capital assets. Under the Internal Revenue Code, a capital asset is defined as any property held by the partnership, but this definition has exceptions. Common examples of capital assets for a partnership include stocks, bonds, and real estate held for investment purposes. These assets are not part of the partnership’s primary business operations.
Certain property is excluded from the definition of a capital asset by Section 1221 of the tax code. These non-capital assets include inventory held for sale to customers, accounts receivable from the ordinary course of business, and depreciable property used in the business. For instance, a delivery truck used by a logistics partnership is not a capital asset, and its sale would be reported on Form 4797, Sales of Business Property.
A primary distinction on Schedule D is between short-term and long-term transactions, based on the holding period. The holding period is the length of time the partnership owned the asset before selling it. An asset held for one year or less results in a short-term capital gain or loss, while an asset held for more than one year generates a long-term capital gain or loss, which affects how the income is taxed on each partner’s personal return.
The form also captures gains from specific situations, such as installment sales reported on Form 6252 and like-kind exchanges from Form 8824. Additionally, it is used to report capital gain distributions from investments in regulated investment companies (RICs) or real estate investment trusts (REITs). These various sources are consolidated on Schedule D to provide a complete picture of the partnership’s capital transaction activities.
Required Information and Form Completion
Completing Schedule D requires specific details for every capital asset sold during the tax year. This includes a description of the property, acquisition and sale dates, the gross sales price, and the asset’s cost or other basis. This data is often first organized on Form 8949, Sales and Other Dispositions of Capital Assets, which then feeds into Schedule D.
Determining the correct basis is necessary to calculate the gain or loss. The basis of an asset is its original cost to the partnership, including the purchase price plus any associated costs, such as commissions or fees. The basis is then adjusted over time for factors like depreciation or improvements, creating what is known as the adjusted basis. For property contributed by a partner, the partnership’s basis is the same as the contributing partner’s adjusted basis at the time of contribution.
The structure of Schedule D is divided into two parts. Part I is for “Short-Term Capital Gains and Losses,” covering assets held for one year or less, and Part II is for “Long-Term Capital Gains and Losses,” covering assets held more than one year. The partnership enters totals from any corresponding Forms 8949 into these sections. For each transaction, the gain or loss is calculated by subtracting the cost or other basis from the sales price. The final lines of each part combine these figures with other gains or losses to arrive at a net short-term and net long-term capital gain or loss for the partnership.
Reporting and Partner Allocation
Once Schedule D is completed, the net short-term and long-term capital gain or loss totals are carried to Schedule K of Form 1065. Schedule K summarizes the partnership’s income, deductions, and credits for the year. The net capital gains or losses are reported on separate lines on this schedule.
The partnership does not pay tax on this income, instead “passing through” these amounts to its partners. The totals from Schedule K are allocated among partners based on the partnership agreement. Each partner’s share is detailed on a separate Schedule K-1.
The information from Schedule D flows to specific boxes on each partner’s Schedule K-1. A partner’s share of the net short-term capital gain or loss is reported in Box 8, and their share of the net long-term capital gain or loss is in Box 9a. If there are any gains from the sale of collectibles, which are taxed at a 28% rate, that amount would be shown in Box 9b.
Each partner receives their Schedule K-1 and uses the information to complete their individual income tax return (Form 1040). The amounts from the K-1 are transferred to the partner’s personal Schedule D (Form 1040). This process ensures each partner pays tax on their portion of the partnership’s capital gains at their individual tax rates.