Our partnership owns rental properties. One of the partners would like to leaves the partnership. It is my understanding that since there is a sale or exchange of 50% of the capital and profits, then this becomes a "technical termination" and the partnership will have to file 2 short year tax returns. Is this correct? Is there any way to avoid a technical termination?

ANSWER

The BIDaWIZ Team's Answer:

Yes, that is correct. It would be a technical termination if the other partner sold or exchange 50% or more of the total interest in a partnership's capital and profits within a 12-month period as referenced in IRC Section 708(b)(1)(B)). This would mean that the partnership would file two short-year tax returns, and the date of the transaction becomes the close of the tax year for the old partnership. A partnership tax return is due 3½ months following the end of the month during which the partnership terminates. Please note that a separate extension can be filed to extend the due date of each respective short-period return by an additional five months. If you decide to bring another partner into the partnership, you can ask that the other partner sell the interest over time. You can meet the IRC requirements if the transaction is staggered over a 12 month period.