Tracking Cost Basis for K-1 producing Investment

me

Anyone have any clever ideas for tracking the cost basis for an investment that produces a K-1? I correctly record distributed cash as dividends, capital gains and returns of capital, but undistributed gains/loses increase/decrease basis and I'm not sure how to record.

I could record losses as a return of capital and hde the cash in a dummy account, but I'm not sure how to record undistributed income that increases my basis. (Quicken does not accept negative return of capital transactions.) Buying shares also doesn't work, because I do not want to increase my share count.

Any ideas?

(Quicken Premier for Windows 2020 R24.11

q_lurker

Using a RtrnCap would be the normal way to adjust the basis up or down.  While you cannot enter a negative RtrnCap as an inline entry (straight to the transaction list), you should be able to do so through the Enter Transactions button and window.  

At the same time, for either case, you should be able to specify the "Transfer Account" as the same account you are using for the entry.  That should make the proceeds of the RtrnCap disappear -- it won't actually alter the cash in that self-referenced account.  

I would consider it odd that the 'investment' would adjust the basis but not make the distribution.  I would guess that is some form of a REIT.  Hopefully the current market value of your shares increases to reflect those undistributed basis-adjusting transactions.  

Jim_Harman

An investment that issues you a K-1 files its own tax return, right? If so, I don't think you want its gains and losses mixed with yours unless they are distributed to you.

One way you might track it would be to put it in an account marked as Separate. That way it well be excluded by default from your tax reports. You can decide whether or not you want to include it in your net worth.

NotACPA

If you set up the K-1 as it's own investment account, perhaps you can "buy" your initial investment at $1 per share, and then adjust the amount of shares as the value of the K-1 changes.  And you can show dividends/etc as coming from this account.

me

> @Jim_Harman said:
> An investment that issues you a K-1 files its own tax return, right? If so, I don't think you want its gains and losses mixed with yours unless they are distributed to you.
>
> One way you might track it would be to put it in an account marked as Separate. That way it well be excluded by default from your tax reports. You can decide whether or not you want to include it in your net worth.

> @Jim_Harman said:
> An investment that issues you a K-1 files its own tax return, right? If so, I don't think you want its gains and losses mixed with yours unless they are distributed to you.
>
> One way you might track it would be to put it in an account marked as Separate. That way it well be excluded by default from your tax reports. You can decide whether or not you want to include it in your net worth.

Jim:

They file their own return as a pass through entity so all gains and losses pass through to me. I certainly want the asset on my net worth and I need to be able track my basis to know the unrealized capital gains/losses.

Tom Young

Using the subscription version of Quicken I was able to enter RtrnCap transactions with positive and negative amounts ..

q_lurker

Using a RtrnCap would be the normal way to adjust the basis up or down.  While you cannot enter a negative RtrnCap as an inline entry (straight to the transaction list), you should be able to do so through the Enter Transactions button and window.  

At the same time, for either case, you should be able to specify the "Transfer Account" as the same account you are using for the entry.  That should make the proceeds of the RtrnCap disappear -- it won't actually alter the cash in that self-referenced account.  

I would consider it odd that the 'investment' would adjust the basis but not make the distribution.  I would guess that is some form of a REIT.  Hopefully the current market value of your shares increases to reflect those undistributed basis-adjusting transactions.  

Tom Young

@q_lurker

"I would consider it odd that the 'investment' would adjust the basis but not make the distribution."

That's just the way it works with pass-through entities.  If they make a ton of money but don't distribute it, you still report that income and your basis increases likewise.  Conversely, cash distributed is generally not an income event, it's a reduction of basis.

The "cash" received when you'd book an undistributed loss should be consumed by a MiscExp entry to some sort of loss Category and vise versa for an undistributed gain.

me

> @q_lurker said:
> Using a RtrnCap would be the normal way to adjust the basis up or down.  While you cannot enter a negative RtrnCap as an inline entry (straight to the transaction list), you should be able to do so through the Enter Transactions button and window.  
>
> At the same time, for either case, you should be able to specify the "Transfer Account" as the same account you are using for the entry.  That should make the proceeds of the RtrnCap disappear -- it won't actually alter the cash in that self-referenced account.  
>
> I would consider it odd that the 'investment' would adjust the basis but not make the distribution.  I would guess that is some form of a REIT.  Hopefully the current market value of your shares increases to reflect those undistributed basis-adjusting transactions.  

Perfect answer. I didn't realize that I could enter the negative return of capital in the form which was what was stumping me. Inline as you point out doesn't work.

This occurs for nearly all my Private Equity investments.

Thank you!

q_lurker

@Tom Young : I was probably too quick with my comment.  For investments from which I receive a K-1, I usually enter their reported-to-me Div, Int, LT Gain, ST Gain, and 'expenses', etc. all as values that will flow to my personal tax forms.  Those produce a net tax-reportable income into my account.  I then enter an adjusting RtrnCap to make the resulting net cash (including the RtrnCap) match the actual distributions from the investment.

If net tax-reportable income = $100, actual distributions = $50, I'd have a -$50 (negative) RtrnCap entry adjusting my basis upward.  (As I see it, they held onto an extra $50 of mine as a further investment of mine into their venture.)

If net tax-reportable income = $100, actual distributions = $150, I'd have a $50 (positive) RtrnCap entry adjusting my basis downward.  (As I see it, they've returned what they earned on my behalf plus an additional $50 of my original investment.)

Seems to work for me.  I am not sure how that correlates with your final comment about a MiscExp entry.  

Rocket J Squirrel

q_lurker said:

For investments from which I receive a K-1, I usually enter their reported-to-me Div, Int, LT Gain, ST Gain, and 'expenses', etc. all as values that will flow to my personal tax forms.

There are K-1 specific tax line items. I have no idea what they do except maybe appear on tax reports. But I'd guess you'd need the transactions to be "MiscInc" or "MiscExp" type and use your own categories with these TLIs.

q_lurker

@Rocket J Squirrel -- Interesting.  I had never chased that far down the list (as best I recall).  I am not sure what that adds to the table.  Does seem to require a MiscInc transaction. 

They do appear in their own section of the Tax Schedule report and appear separately on a Tax summary report -- basically because they and up in a different category.  That is comparing the Schedule K-1:Dividends assignment to the standard _DivInc category with the Schedule B:Dividend Income line.  

In that I have been treating the transactions as if the investment 'paid' the dividends (DivInc transaction) rather than passed through the dividend, I am used to getting a total of all my Dividends in one place, which is where they all eventually end up on Schedule B.  

Looks like I'll continue to bypass that new possibility.  Thanks.

Jim_Harman

Aslo IIRC the Schedule K-1 Dividends are not included in the dividends used in the Tax Planner.

Tom Young

@q_lurker

My case was the simplest possible situation of only "losses" or "gains" with no cash distributions or inflows and without making the necessary income tax return distinctions, slicing and dicing the dollars into all the "special" statutory items.  (I've never tried it but I would guess that in a complex situation with a Schedule K-1 with dozens and dozens of income/expense entries using myriad codes you'd go crazy trying to make all those distinctions via Quicken entries.)

So, a pass through entity reports a gain of $100 but distributes none of it you do a negative return of capital of $100.  Then get rid of the negative cash as

Debit (increase) cash $100

Credit (increase) some income Category $100

If you know exactly what Categories to use, great, use them.

q_lurker

Tom Young said:

... 

So, a pass through entity reports a gain of $100 but distributes none of it you do a negative return of capital of $100.  Then get rid of the negative cash as

Debit (increase) cash $100

Credit (increase) some income Category $100

If you know exactly what Categories to use, great, use them.

"So, a pass through entity reports a (LT) gain of $100 ..."

• I enter a LTCapGain for $100 so that somewhere I see that as taxable income.  It is not really a MF cap gain distribution but tax-wise it ends up in the right area.  That increases cash in the account by $100.  (Substitute other income types accordingly)

"... but distributes none of it, ..."

• I enter a negative RtrnCap of $100 so that I no longer have the cash in the account.  That increases the 'basis' in the pass-through investment.  I am not positive that is correct but it gets me by for now.  

You seem to be approaching from the opposite side -- doing first the negative RtrnCap, then trying to decide what the balancing transaction is.  I think we are ending up the same place.  Typically, I don't know any of this until 1099s and K-1s come out, though there may be a prior distribution to address initially.