Selling a K-1 Fund Interest: Section 751, Form 8308, 1446(f)

One sale, five slices

The price you receive does not decide the tax by itself. The Code splits a sale of a partnership interest into pieces by what the partnership owns, and each piece goes to a different line of your return. Publication 541 states the starting rule, “The sale or exchange of a partner’s interest in a partnership usually results in capital gain or loss,” subject to the exception for unrealized receivables and inventory items, and it adds that a seller relieved of partnership liabilities “must include the liability relief as part of the amount realized.” Its own example has a limited partner who sells for $10,000 in cash while relieved of $15,000 of partnership debt and “realizes $25,000.”

The residual slice is the one people forget can be negative. Regulation 1.1(h)-1(f), Example 1, has a seller whose interest produces $7,000 of ordinary income and a $1,000 capital loss before the look-through; with $1,000 of collectibles gain carved out, the seller recognizes “a $2,000 residual long-term capital loss.” The slices are computed separately from the fund’s deemed sale, so a loss in one is not netted away inside the interest.

What is hot in a real estate fund

Section 751(c) defines unrealized receivables as rights to payment for goods and services not yet in income, and then adds property the fund would have to treat as ordinary if it sold it: “section 1245 property,” “section 1250 property,” market discount bonds, short-term obligations and others, “but only to the extent of the amount which would be treated as gain” under the recapture sections. Section 751(d) adds inventory items, which include property that on sale would be neither a capital asset nor a section 1231 asset. The Form 8308 instructions, revised November 2025, summarize both lists. Applied to what real estate funds hold:

Two consequences follow. First, a fund that cost-segregated its buildings and took bonus depreciation carries a larger hot slice per unit than one that depreciated everything straight line, and the 100% bonus now available means a fund that bought after January 19, 2025 can have deducted the whole cost of its equipment-type property. Second, a fund with any such property is within the Form 8308 instructions’ own words: “Generally, any sale or exchange of a partnership interest (or any portion) at a time when the partnership has any unrealized receivables or inventory items is a section 751(a) exchange.” Even a small hot slice triggers the notice, the Form 8308 and the statement below.

One mismatch worth knowing when you read the regulation itself: paragraph (a)(1) of Regulation 1.751-1 still speaks of “substantially appreciated inventory items,” while section 751(a) as printed in the Code, and the Form 8308 instructions, say only “inventory items.” The 120% appreciation test now lives in section 751(b)(3), which governs distributions, not sales.

The 25% layer is a look-through, and the fund has to compute it

Regulation 1.1(h)-1(b)(3)(ii) measures your slice by pretending the partnership “transferred all of its section 1250 property in a fully taxable transaction for cash equal to the fair market value of the assets immediately before the transfer of the interest in the partnership.” Your slice is the section 1250 capital gain that would be allocated to you from that sale, for the part of your interest held more than one year. The same paragraph says that if you recognize less than all of your realized gain, the fund is treated as selling only a proportionate part of each property. Two details matter in practice:

• It is a share of the fund’s gain, not of your own depreciation. The fund computes it from its books for the interest sold, so you cannot work it out from your K-1 alone. Form 8308 Part IV column (a) holds the fund-level figure and column (c) yours.
• A recent top-up can split your holding period. The regulation’s Example 5 is titled “Sale or exchange of partnership interest where part of the interest has a short-term holding period.” If you added capital within the last year, part of the sale is short-term and the look-through applies only to the long-term part.

The Schedule D instructions (2025) say what to do with the figure: “Include on line 10 your share of the partnership’s unrecaptured section 1250 gain that would result if the partnership had transferred all of its section 1250 property in a fully taxable transaction immediately before you sold or exchanged your interest in that partnership,” and attach the statement required by Regulation 1.1(h)-1(e).

A worked sale, line by line (our arithmetic)

The facts below are our assumptions, chosen to show the mechanics. They are not data from any fund. A single filer bought LP units in an apartment fund in 2021 for $250,000. At the sale in 2026 her share of the fund’s nonrecourse mortgage debt is $400,000 and her adjusted basis in the interest, which includes that debt share, is $430,000. A secondary buyer pays $300,000 in cash and takes over her share of the debt. The fund tells her that, on a deemed sale of everything at fair market value, her share would produce $60,000 of section 1245 recapture, no section 1250 ordinary recapture, $110,000 of section 1250 capital gain (straight-line depreciation on the building) and $100,000 of other appreciation. She has $700,000 of other taxable income, so every dollar of the sale lands above $640,600 and above the $545,500 limit of the 15% rate.

The layers add $15,700 to the bill: 17 points more on the $60,000 ordinary slice ($10,200) plus 5 points more on the $110,000 layer ($5,500). The cash is $300,000 and the tax is $79,960, because the $400,000 of debt relief is part of what she is taxed on and not part of what she is paid. State tax is ignored. What moves the number is the hot slice, as the same $270,000 gain shows when only that slice changes:

What she files. The fund sends her Form 8308 Parts I to III by January 31, 2027 (sale in 2026) and shows $60,000 under code AB and $110,000 under code AD on her 2026 Schedule K-1. Her return carries the statement Regulation 1.751-1(a)(3) requires: the date of the sale, $60,000 attributable to section 751 property and $210,000 attributable to capital gain. The Form 8308 instructions say the hot amount may be reported on Form 4797 and the capital amount on Form 8949, with the 25% slice on the Schedule D worksheet. If she had been paid in installments, Publication 541 says the gain on unrealized receivables and inventory is reported in the year of sale, and only the rest may use the installment method.

Who files what, and when

Publication 541 puts the seller’s exposure plainly: “A partner may be subject to a $50 penalty for each failure to notify the partnership about such a transaction, unless the failure was due to reasonable cause and not willful neglect.” The partnership’s penalties run under sections 6721, 6722 and 6698 and rise for intentional disregard. A partnership may rely on a written statement from the seller that the transfer was not a section 751(a) exchange “unless the partnership has knowledge to the contrary,” and the instructions let a partnership in doubt file the form to avoid a penalty.

The change in the November 2025 instructions. Before it, partnerships also had to furnish Part IV to the partners by January 31. The revised instructions say they “are no longer required” to furnish Part IV by January 31, although the Part IV amounts must still reach the seller in K-1 box 20. If the Form 8308 you receive conflicts with the K-1, the instructions tell you to rely on the K-1 and ask for a corrected Form 8308.

Form 8594 does not apply. The instructions for Form 8594 list “A partnership interest is transferred” among the cases where the form is not required. The one exception, Revenue Ruling 99-6, concerns the purchase of an interest treated as a purchase of partnership assets that make up a trade or business, and the form is then filed by the purchaser.

If a foreign person sells: section 1446(f)

Section 1446(f)(1) requires the buyer to withhold “a tax equal to 10 percent of the amount realized” when a foreign person sells an interest and any part of the gain would be treated as effectively connected income under section 864(c)(8). For a non-traded partnership interest the rules are in Regulation 1.1446(f)-2; interests in publicly traded partnerships sold through brokers are handled in 1.1446(f)-4 (our reading is that privately offered fund units are not publicly traded partnership interests).

On our example facts, a foreign seller who could not claim an exception would have $70,000 withheld (10% of $700,000), which is 23.3% of the $300,000 cash (our arithmetic). For U.S. sellers the practical point is narrower: expect to sign the certification in the closing documents, and expect the fund or the secondary platform to ask for it before the transfer is registered (our reading).

What changed for 2026

• Bonus depreciation at 100% for property acquired after January 19, 2025. Public Law 119-21 section 70301 replaced “the applicable percentage” with “100 percent” in section 168(k)(1)(A) and repealed the phase-down. Funds that bought after that date can hold a larger section 1245 slice than the same fund in 2024. Our bonus depreciation guide covers the acquisition-date rules.
• Form 8308 instructions revised November 2025 (Part IV no longer furnished by January 31) and Publication 541 revised December 2025. The instructions say “Use with the October 2024 revision of Form 8308,” which is the form to use for a 2026 sale.
• Form 8288 instructions revised January 2026. They cover section 1446(f)(1) transfers of partnership interests, and the revision adds direct-deposit lines for refunds.
• 2026 rate limits from Rev. Proc. 2025-32: the 15% rate ends at $545,500 of taxable income for a single filer and $613,700 for a joint return; the 37% bracket begins above $640,600 (single). The 25% and 28% maximums and the 3.8% thresholds are in the Code and do not change with inflation.

What a reader can do with this

These are the levers the rules create, not a recommendation for any sale.

• Ask the sponsor for the deemed-sale figures before you price the units. The slices (hot, collectibles, unrecaptured section 1250, residual) per unit are what the fund will report in Form 8308 Part IV; in our table they are the difference between a 25.8% and a 33.4% outcome on the same gain. A fund that cost-segregated and took bonus depreciation will have a larger hot slice.
• Check how the buyer is being paid and who is reporting. Ask whether a broker will issue a Form 1099-B (the Form 8308 instructions say Form 8308 is then not needed) and who at the sponsor receives the written notice.
• Diarize the notice date. Thirty days from closing or January 15, whichever is earlier. For a sale on December 20, 2026 that is January 15, 2027; for a sale on November 9, 2026 it is December 9, 2026 (our arithmetic).
• Add up the liability relief. The debt share is in the amount realized and in the 1446(f) base; the ending capital account and debt share on your last K-1 are where to start (see our guide to reading a K-1).
• Ask whether the fund has a section 754 election. Publication 541 says the partnership can elect an optional adjustment to basis in the year of a transfer; it changes the buyer’s side of the deal, not your tax.
• Look at the other lines the sale touches. A taxable sale of the whole interest can release suspended passive losses (see suspended passive losses at sale or death); the gain can add to the 3.8% tax (net investment income tax on real estate); and the K-1 is the document that carries it all (K-1 or 1099). For the market side, see our page on secondary-market funds open to individuals, and for depreciation on a property you own directly, depreciation recapture on a rental property.
• Compare it with what a sponsor’s own filing says. One registered real estate fund we read, Wellings Real Estate Income Fund (Form 10-K filed June 30, 2025), tells shareholders that gain on a sale of shares is capital gain “except to the extent attributable to” the fund’s “unrealized receivables,” which are ordinary income.

Whether to sell, hold or wait for a distribution is a decision about the whole balance sheet, and the federal tax above is one input. The box below connects readers with fee-only or fee-based advisers through WiserAdvisor. We are paid if you request a match, we have not vetted any adviser, and the match is for the sale decision, not for preparing Forms 8308, 4797 or 8949 (our reading of what the box offers).

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 29, 2026: 26 U.S.C. 1, 168, 741, 743, 751, 752, 754, 1245, 1250, 1411, 1446 and 6050K (Legal Information Institute, Cornell); Treasury Regulations 1.751-1, 1.752-1, 1.1(h)-1, 1.6050K-1, 1.1446(f)-1 and 1.1446(f)-2 (Legal Information Institute, Cornell) and 1.1411-7 (eCFR, version of October 1, 2026, “[Reserved]”); Form 8308 (Rev. October 2024) and Instructions for Form 8308 (Rev. November 2025); Publication 541 (Rev. December 2025); Partner’s Instructions for Schedule K-1 (Form 1065) (2025); Instructions for Schedule D (Form 1040) (2025); Instructions for Form 4797 (2025); Instructions for Form 8960 (2025); Instructions for Form 8594 (Rev. November 2021); Instructions for Form 8288 (Rev. January 2026); Rev. Proc. 2025-32, irs.gov; Wellings Real Estate Income Fund, Form 10-K, accession 0001213900-25-059194 (sec.gov). Worked examples are our arithmetic on assumed facts. This is analysis of public documents, not investment, legal or tax advice.