Liquidating distribution detailed example
In a liquidating distribution, if a partner's outside basis in the partnership exceeds the cash received plus the FMV of any property received, then the partner will recognize a loss to the extent of the excess.
So if a partner's outside basis was 0,000 in a partnership, but received ,000 in cash and ,000 worth of inventory items, then the terminating partner would recognize a capital loss of ,000 .
Whether earnings are retained in a partnership or distributed to partners has no affect on the taxation of those earnings, since the partners have to pay tax on the earnings whether they are distributed or not.
The outside basis is the tax basis of each individual partner's interest in the partnership.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.The property basis that remains after subtracting the outside basis is taxable as a gain. If distributed property also had a secured liability, then the partner assumes the liability which decreases her share of the partnership's liabilities.The other partners' share of liabilities is also decreased by the deemed distribution.