Proposed changes to hot asset reporting for partnerships

Tax Hot Topics

The IRS on Aug. 19, 2025, released proposed regulations that would relax the obligation for a partnership to provide information to its partners on the amount of ordinary income or loss underlying a transferred partnership interest. This requirement is currently set forth in Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests. The proposed changes would apply beginning in the 2025 tax year.

Under the proposed regulations, partnerships are expected to continue providing Form 8308, Parts I, II and III, to transferee and transferor partners who participated in a section 751(a) exchange by Jan. 31 of the year following the exchange. However, a completed Form 8308, including information on any gain from inventory or unrealized receivables (known as hot assets) required by Part IV of the form, will be required only as an attachment to the return for the year in which the sale of partnership interests occurred. This modified guidance also would require partnerships to provide transferor partners the information required under Part IV with their Schedule K-1.

Background

Current regulations under Section 6050K (Regs. Section 1.6050K-1(a)(1)) require a partnership to provide information to a transferee and transferor partner when there has been a sale of an interest in a partnership that owned inventory or unrealized receivables (a Section 751(a) exchange). Regs. Section 1.6050K-1(c)(1) provides that the required information should be included on Form 8308, which must be provided to the transferor and transferee partner by Jan. 31 of the year following the exchange, or if later, 30 days after the partnership has notice of the exchange.

Starting with the 2023 tax year, revisions to Form 8308 included a new Part IV that requires a partnership to report the amount of the partnership’s and the transferring partner’s share of Section 751(a) hot assets gain or loss, collectibles gain under Section 1(h)(5), and unrecaptured Section 1250 gain under Section 1(h)(6). The inclusion of this Part IV information on Form 8308 accelerated the requirement to provide section 751(a) information to transferee and transferor partners from the due date of the return (including extensions) to Jan. 31 of the calendar year following the year of the exchange. In many cases, partnerships did not have the Part IV information by Jan. 31, and the IRS has provided limited relief from penalties for partnerships that failed to meet the deadline in recent years.

Proposed regulations

The IRS received comments on the difficulty and undue burden associated with completing Part IV of Form 8308 by Jan. 31. In response it has issued proposed regulations that would require only the information in Parts I, II and III by that date. The revised Form 8308 instructions would continue to provide that a completed Form 8308, including Part IV, must be included as an attachment to its Form 1065 for the taxable year of the partnership that includes the last day of the calendar year in which the section 751(a) exchange took place. Additionally, the proposed regulations do not change any information required to be reported on the Schedule K-1 issued to the transferor partner, as provided in the form and instructions.

The proposed regulations are to be effective for tax years ending on or after the date they are published as final in the Federal Register. However, the preamble explains that a partnership may rely on these proposed regulations, and a description of the anticipated changes to the instructions to Form 8308, for section 751(a) exchanges occurring on or after Jan. 1, 2025, and before the proposed regulations are finalized.

In summary, for sales of partnership interests that include a Section 751(a) exchange made on or after Jan. 1, 2025, partnerships may proceed as follows:

1. Form 8308, Parts I, II and III must be provided to the transferor and transferee by Jan. 31 of the year following the exchange.
2. Form 8308, completed in its entirety (Parts I– IV) must be included with Form 1065 as an attachment when filed.
3. The proposed regulations do not change any reporting requirements for Schedule K-1.

Contacts: