If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property.
For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later.
In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables.
Property A has an adjusted basis to the partnership of ,000 and a fair market value of ,000.
Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner.
See Adjusted Basis under Basis of Partner's Interest, later. A partnership generally does not recognize any gain or loss because of distributions it makes to partners.
Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. The partnership must adjust its basis in any property the partner contributed within 7 years (5 years for property contributed before June 9, 1997) of the distribution to reflect any gain that partner recognizes under this rule. Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain.
For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership.
If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner.A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership.Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution.The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. A partner does not recognize loss on a partnership distribution unless all the following requirements are met. The partner is treated as having satisfied the debt for its fair market value.If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt.The distribution decreases the adjusted basis of Jo's partnership interest to ,000 [,000 - (,000 ,000)]. Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution.This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later).Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution.A 5-year period applies to property contributed before June 9, 1997, or under a written binding contract: The character of the gain is determined by reference to the character of the net precontribution gain.Property B has an adjusted basis to the partnership of ,000 and a fair market value of ,000.To figure her basis in each property, Julie first assigns bases of ,000 to property A and ,000 to property B (their adjusted bases to the partnership).