IRS Grants Relief for Partnerships Reporting Hot Asset Sales

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In new rules, the IRS has delayed the deadline for partnerships to report transfers of hot assets when a partner sells or exchanges their interest. The previous rule set January 31 of the year following the transfer as the due date for reporting the transfers on Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests. If the information is not reported in a timely fashion, the partnership faces penalties.

Hot Assets = Ordinary Income

What is a hot asset? An asset that yields ordinary income or loss. Generally, when a transferor partner sells or exchanges their partnership interest, any amount recognized is considered a capital gain or loss. However, any amount received by a transferor partner attributable to (1) unrealized receivables of the partnership, or (2) inventory items of the partnership, is treated as ordinary income. Because of the potential for partnerships to try and convert ordinary income into capital gain, the tax rules require enhanced reporting of transfers of hot assets to partners.

Original Reporting Rules Delayed

A separate Form 8308 is required for each hot asset transfer and asks for the following information:

the names, addresses and taxpayer identification numbers of the transferee and transferor in the exchange and of the partnership filing the return;
the date of the exchange;
any other information required by Form 8308 or its instructions.

The previous rules required that the partnership furnish the Part IV information on hot asset transfers to the transferor and transferee by January 31 and then attach Form 8308 to its later Form 1065, U.S. Return of Partnership Income.

In 2023 and 2024, the IRS received comments on this deadline, noting that many partnerships are unable to furnish the information required by the January 31 due date because they may not have all the information at that time. As a result, the IRS issued two notices that waived the penalty for missing the deadline for transfers occurring in calendar years 2023 and 2024.

Now, the new proposed regulations have dispensed with temporary relief and have adopted a new reporting deadline, effective in 2025.

New Deadline Details

The proposed rules provide that only the information in Parts I, II and III of Form 8308 is required by the January 31 deadline. Specifically, the deadline is the later of (1) January 31 of the year following the calendar year in which the exchange of hot assets occurred, or (2) 30 days after the partnership has received notice of the exchange.

This preliminary information includes:

Partnership identification
Transferor information
Transferee information
Date and type of transfer

The information in Part IV, the Partner’s Share of Gain (Loss), that will be reported to the selling partner on their Schedule K-1, will be due at the time of the filing of the partnership’s Form 1065. The proposed regulations are effective for exchanges occurring on or after January 1, 2025.

This resolution of the timing problem for reporting hot asset transfers is a welcome change for partnerships. The new deadline aligns much better with a partnership’s recordkeeping practices, which require the tracking of each partner’s contributions, distributions and share of profits and losses. The proposed regulations will likely be finalized soon. Meanwhile, the proposed regulations are retroactive to the beginning of this year and can be relied upon by taxpayers.