ROANOKE TIMES 
                      Copyright (c) 1997, Roanoke Times

DATE: Monday, March 24, 1997                 TAG: 9703250050
SECTION: MONEY                    PAGE: 6    EDITION: METRO 
COLUMN: TAX QUESTIONS

DEDUCTING LIMITED PARTNERSHIP LOSSES

Q: I have been a participant in a limited partnership, namely Merrill Lynch Hubbard Realty Partnership IV, from which I have been receiving yearly K-1 forms. I have been abiding by the appropriate IRS instructions and have included the K-1 data in my annual income tax returns since 1984.

I have also been keeping a record of my original investment dollars and monies received back from the partnership as "Return of Principal," which resulted from the sale of properties by the Partnership through the years. A copy of this record is enclosed. I entered into this partnership upon its initial offering (May 1984) and stayed until it closed Dec. 20, 1996.

My question is: Can I include as a capital loss on my 1996 return the difference between my initial investment and monies returned to me through the years as "Return of Principal"? Or has such difference been accounted for (absorbed through the years) in the K1 calculations?

A: Gain or loss on the sale or liquidation of a partnership interest is determined by deducting the partner's basis from any proceeds received. Generally, the basis of a partner's interest is increased by his distributive share of partnership taxable income and tax-exempt income. Conversely, the basis of a partner's interest is decreased by distributions received from the partnership, partnership loss and partnership expenses not deductible in computing the taxable income of the partnership (and not chargeable to the capital accounts).

To answer your specific question, I would obviously need additional information because partnerships can be quite complex. However, you are correct in suspecting that the K1's received through the years affect your basis for determining gain or loss. In addition to the partnership distributions (Returns of Principal), you will need to account for the income and losses of the partnership during your investment to determine your basis. Item J on your final K1 from the partnership is an analysis of your capital account and is a good place to start in determining basis.

-Answered by Clark Cole of Cole and King

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