Liquidating distribution partnership basis

If a partner receives an inventory item from the partnership, and the partner disposes of the item within 5 years, then he must recognize ordinary gain or loss on the property, regardless of whether it would otherwise be a capital asset.

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The inside basis is the partnership's tax basis in the individual assets.

The outside basis is the tax basis of each individual partner's interest in the partnership.

If there is any excess basis over the partnership's interest, then the assigned bases must be reduced by the excess.

Any remaining allocable basis is then assigned to the remaining properties, reduced by any excess basis over the partner's remaining interest.

A partnership’s income, losses, deductions, and credit are passed through to the partners for Federal tax purposes and taxed directly to them, regardless of when income is distributed.[1] Since the partners have already paid tax on the income when it is earned, a complex system of rules applies to prevent double taxation when the income is later distributed to the partners.

These rules (a) allocate the partnership’s income, losses, deductions, and credit among the partners and (b) adjust basis to reflect each partner’s allocation of those items.

When property is distributed to a partner, then the partnership must treat it as a sale at fair market value ().

The partner's capital account is decreased by the FMV of the property distributed.

In a liquidating distribution, the basis of property received by a partner is equal to the basis of the partnership interest minus any money received in the same transaction, so the carryover basis in the property can never be greater than the partner's outside basis in the partnership: Partner's Basis in Property in Liquidating Distribution = Partner's Outside Basis – Money Received If a partner has an outside basis of 0,000 and receives a liquidating distribution of 0,000, then a ,000 gain would be recognized, but if the ,000 had been property and the rest cash, then the gain would not be recognized, but the partner's basis in the property would be zero, so taxes would have to be paid on the gain of the property when it is sold: Partner's Basis in Property = 0,000 Outside Basis – 0,000 Cash Received A gain or loss may also be recognized by a partner who contributes property to the partnership that, subsequently, is distributed to another partner within 7 years, in which case, the contributing partner would recognize a gain of the FMV of the property over the partner's original tax basis in the property.

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