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Tax fallout from partnership breakup

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Q. My business partner and I are splitting up. If I sell my interest to him, will it be taxed as capital gain? M.C.B., St. Louis

A. Yes. As a general rule, the sale of an interest in a partnership will result in a taxable gain or loss to the seller under the usual rules for capital gains. However, be aware that you may recognize ordinary income allocable to certain items such as unrealized receivables, appreciated inventory and previous depreciation write-offs.

For 2013, the maximum federal tax rate on long-term capital gains is 20% for single filers with taxable income above $400,000 and joint filers with taxable income above $450,000. For 2014, these thresholds increase to $406,750 and $457,600, respectively. The top federal rate on ordinary income is 39.6%, and it kicks in at the same taxable income thresholds as the 20% maximum long-term capital gains rate.

Tip: Consult with a tax pro for the exact breakdown.

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