When partners form the business, they might contribute property that has changed in value since they purchased it.
To claim tax losses from a partnership (including an LLC taxed as a partnership), a partner must have sufficient tax basis and “at-risk” investment in his partnership interest.
In a typical real estate partnership, a partner’s tax basis and at-risk investment is derived from his equity contribution plus his share of partnership “recourse” liabilities and his share of “non-recourse” liabilities (in the case of computing tax basis) and his share of “qualified non-recourse financing” (in the case of computing at-risk investment).
The partnership just assumes the same basis as the partner.
If the partnership disposes of the property at liquidation, that partner must recognize the gain or loss as if he had sold it himself rather than having the gain or loss allocated among all the partners.
The partner transfers his basis in the partnership to the property after accounting for any cash, receivables and inventory.
So if a partner had a basis of ,000 in the partnership and received a liquidating distribution of ,000 cash and a plot of land worth ,000 he would allocate his remaining ,000 of basis to the land.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005.
His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce.
Recourse liabilities are those for which a partner bears the economic risk of loss, whereas non-recourse liabilities are those for which no partner bears the economic risk of loss.
Likewise, a qualified non-recourse financing is a financing meeting certain conditions, including that no partner has personal liability for its repayment.
Because the partnership is not a separate tax entity, any gains or losses pass through to the partners when the partnership liquidates.