Sect. 1231 Gains...Can they be classified as Partnership Income?

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Below is the scenario that is unfolding for us. Looking to minimize taxes and and maximize retirement funding.

Appreciate any insights.


I am part of a multi member LLC that has rental properties taxed as a Partnership.

We sold 2 properties (held for 20 yrs) which have accumulated a lot of depreciation.

Using Turbo Tax Business, I see a Section 1231 Gains on my K-1. ($105K)

Question: Can these Long Term Section 1231 Gains be Treated as Ordinary Income for the Partners?

I would like to salary defer (max. SOLO 401 K limit of $53K) with Income.

Our net income for the properties this year was only $20K from rents since the buildings were empty during the listing/sale period.

When you sell any investment or rental property you are subject to depreciation recapture. 

It is a 1231 gain there is no way to make it regular income for the business. It's the gain on the sale of the property- not income. 

The gain is un-related to the income for the year. 

Unfortunately your rents would not qualify either unless you have guaranteed payments.

"Compensation. Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define compensation as including all the following payments.

  1. Wages and salaries.
  2. Fees for professional services.
  3. Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items.
    1. Commissions and tips.
    2. Fringe benefits.
    3. Bonuses.

For a self-employed individual, compensation means the earned income, discussed later, of that individual."