What Is the 63/17 Safe Harbor for PTP Sales?

When you sell an interest in a Publicly Traded Partnership (PTP), the tax documents you receive will provide a breakdown of your gain. The purpose is to streamline tax reporting by giving you a pre-calculated figure for the ordinary income portion of the sale, which must be reported differently from the capital gain. This reporting method relieves you from having to perform a complex analysis of the partnership’s underlying assets.

Understanding the Components of Gain on a PTP Sale

The sale of a PTP interest is not treated like the sale of corporate stock, where the gain or loss is capital. Instead, the tax code requires a more detailed look into the partnership’s assets at the time of the sale. This is governed by Internal Revenue Code Section 751, which was enacted to prevent taxpayers from converting what would be ordinary income into more favorably taxed long-term capital gains.

This rule identifies certain assets as “hot assets,” which are primarily unrealized receivables and inventory items. Unrealized receivables can include rights to payment for goods or services that have been delivered or rendered but not yet included in income. Inventory includes any property held for sale to customers in the ordinary course of business.

When you sell your PTP interest, the portion of your gain that is attributable to your share of these “hot assets” must be recharacterized and taxed as ordinary income. Any remaining gain or loss from the sale of your PTP units is then treated as a capital gain or loss.

How Ordinary Income Is Reported to You

Tax law requires the PTP to perform the complex calculations necessary to determine the ordinary income component on behalf of its selling partners. This information is then provided to investors to ensure accurate tax reporting. For an investor, the information is provided on the supplemental sales schedule that accompanies the annual Schedule K-1. This document explicitly states the amount of gain that must be treated as ordinary income, which represents your share of the gain from the partnership’s “hot assets.”

Reporting the Sale on Your Tax Return

When you are ready to file your tax return, you will need your Form 1099-B from your broker and the Schedule K-1 package from the PTP, which includes the sales schedule detailing the ordinary income amount. The first step is to determine your total gain or loss. This requires calculating your adjusted basis, which starts with your original purchase price and is adjusted for items reported on the K-1s during your holding period, such as distributions, income, and losses. The total gain is the difference between your sales proceeds and this adjusted basis.

The entire transaction is first reported on Form 8949, Sales and Other Dispositions of Capital Assets. You will enter the gross sales proceeds from your 1099-B in column (d) and your cost basis in column (e). Because the basis reported by your broker is often incorrect for PTPs, you will likely need to make an adjustment. The ordinary income portion, provided on the K-1 sales schedule, is entered as a negative adjustment in column (g) of Form 8949, using code “O” in column (f).

Next, you must report the ordinary income portion separately. This amount, taken directly from the PTP sales schedule, is reported on Form 4797, Sales of Business Property. It is entered on Part II, line 10, as “Ordinary gain from IRC section 751 assets.”

Finally, the net result from Form 8949 flows to Schedule D, Capital Gains and Losses. After backing out the ordinary income component on Form 8949, the remaining amount represents your true capital gain or loss from the sale. This adjusted figure is combined with any other capital transactions on Schedule D.