Limited Partnerships

[KCarlander]

Is there a way to enter and track an investment in a limited partnership or any type of investment that begins with a capital contribution and receives returns in the form of distributions? There are not shares or prices per se.

[Mark]

Hi KCarlander,

Yes, just treat it like a cash account. Keep the price fixed at $1. All transactions occur at a price of $1 and the shares are equal to the value.

[KCarlander]

Hi Mark,

Coming back to this, can you help me understand a few things more clearly. The examples are partnerships into which we've made a series of capital contributions and for which we receive monthly reports with summary and detail of "net capital change" (distributions of capital, distributions of income), "net change in portfolio" (realized gain/(loss), unrealized gain/(loss), "net investment income" (income net of expenses, management fees).

Is it possible to record each of these monthly changes in a way that results in accurate cost basis and performance?

Thanks.

Kristin

[Mark]

Hi Kristin,

Whenever you have any type of distribution, just record a distribution. If the distribution was paid to you in cash, it is a 'distributed' distribution. If the distribution changed the value of your holdings, it is a reinvested distribution. If the value increased, record a positive reinvested distribution. If it decreased in value, record a negative reinvested distribution. There are different distribution types you can use, and pick the most appropriate one. You could keep it simple, and just record one reinvested distribution each month for all the items combined, to reflect the change in value of your holding. Record any reinvested distributions at your fixed $1 share price.

For performance purposes, it doesn't matter what type of distribution you categorize these as.

Your tax cost basis is only affected by purchases/sells, and any "Return of Capital" or "Account Fee" distribution types.

[KCarlander]

Mark,

Thanks, it looks as if I was recording distributions correctly. Maybe I am not entering other changes correctly.
How should I enter 'realized gain/(loss)', 'unrealized gain/(loss)' and income net of expenses to result in correct cost basis and performance?

Kristin

[Mark]

Hi Kristin,

You can enter these as distributions also. You can lump them all together into 1 if you want. At the end of every month, just look at what is your total investment value (after all the distribution types), and make a reinvested distribution for the change since last month. If you received anything in cash, record this as another distribution, but a 'distributed' one.

[KCarlander]

Mark,

I'm having a problem because the Return of Capital Distributions are distributed as cash but also result in a reduction of the cost and value of the investment.

I haven't been able to find a combination of entries that results in both an approximately correct ending value and IRR.

I'd also like if reports including 'distributions' (i.e. portfolio performance) could breakout reinvested and cash distributions.

K

[Mark]

Hi KCarlander,

For the "Return of Capital" distributions paid in cash, record this as a "distributed" distribution of type "Return of Capital". This lowers your tax cost basis, and correctly accounts for this distribution in the performance figures.

[KCarlander]

But the ending value ends up overstated by the amount of the distributed distributions.

[Mark]

You could handle this in 2 different ways:

1) Record it as a sell. This way, you can reduce your shares owned, and keep the price fixed at $1.

2) Record it as a distributed "Return of Capital" distribution, and also lower the closing price to get your value correct, keeping the same number of shares owned. All future transactions will be recorded at this new lower price.

Both methods will reduce your remaining tax cost basis. The first method has the benefit if being able to simply keep the share price fixed at $1. The drawback of method 1 is that you will have a capital gain reported in the capital gains report.

[KCarlander]

If I record as a sell, should I not also enter it as a return of capital?

[Mark]

No, if you record it as a sell, you do not also want to record the return of capital distribution. Essentially, this partnership is returning money to you. This is the same as if you sold some of your shares (except that they initiated the return). A Return of Capital distribution is useful when you get money out, but the number of shares stayed the same. Usually, when a stock does a Return of Capital, your share balance stays the same, but there is a drop in share price, thus the remaining value of these shares goes down.

[KCarlander]

Hi Mark,

I'm sorry to be back again - but it seems that entering the distributions (cash but also reduce value) as sales results in distorted performance (substantially understated).

Kristin

[Mark]

Hi Kristin,

How are you determining the performance is understated? Can you give me an example?