Basis of Partner's Interest The basis of a partnership interest is the money plus the adjustedbasis of any property the partner contributed. If the partner mustrecognize gain as a result of the contribution, this gain is includedin the basis of his or her interest. Any increase in a partner'sindividual liabilities because of an assumption of partnershipliabilities is considered a contribution of money to the partnershipby the partner. Interest acquired by gift, etc.If a partner acquires an interest in a partnership by gift,inheritance, or under any circumstance other than by a contribution ofmoney or property to the partnership, the partner's basis must bedetermined using the basis rules described in Publication 551. Adjusted Basis The basis of an interest in a partnership is increased or decreasedby certain items. Increases.A partner's basis is increased by the following items. The partner's additional contributions to the partnership,including an increased share of or assumption of partnershipliabilities. The partner's distributive share of taxable and nontaxablepartnership income. The partner's distributive share of the excess of thedeductions for depletion over the basis of the depletable property,unless the property is oil or gas wells whose basis has been allocatedto partners. Decreases.The partner's basis is decreased (but never below zero) by thefollowing items. The money (including a decreased share of partnershipliabilities or an assumption of the partner's individual liabilitiesby the partnership) and adjusted basis of property distributed to thepartner by the partnership. The partner's distributive share of the partnership losses(including capital losses). The partner's distributive share of nondeductiblepartnership expenses that are not capital expenditures. The partner's deduction for depletion for any partnershipoil and gas wells, up to the proportionate share of the adjusted basisof the wells allocated to the partner. The partner's share of any section 179 expenses, even if thepartner cannot deduct the entire amount on his or her individualincome tax return. Partner's liabilities assumed by partnership.If contributed property is subject to a debt or if a partner'sliabilities are assumed by the partnership, the basis of thatpartner's interest is reduced (but not below zero) by the liabilityassumed by the other partners. This partner must reduce his or herbasis because the assumption of the liability is treated as adistribution of money to that partner. The other partners' assumptionof the liability is treated as a contribution by them of money to thepartnership. See Effect of Partnership Liabilities, later. Example 1.John acquired a 20% interest in a partnership by contributingproperty that had an adjusted basis to him of $8,000 and a $4,000mortgage. The partnership assumed payment of the mortgage. The basisof John's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by otherpartners (80% $4,000)      3,200 Basis of John's partnership interest     $4,800 Example 2.If, in Example 1, the contributed property had a $12,000 mortgage,the basis of John's partnership interest would be zero. The $1,600difference between the mortgage assumed by the other partners, $9,600(80% $12,000), and his basis of $8,000 would be treated ascapital gain from the sale or exchange of a partnership interest.However, this gain would not increase the basis of hispartnership interest. Book value of partner's interest.The adjusted basis of a partner's interest is determined withoutconsidering any amount shown in the partnership books as a capital,equity, or similar account. Example.Sam contributes to his partnership property that has an adjustedbasis of $400 and a fair market value of $1,000. His partnercontributes $1,000 cash. While each partner has increased his capitalaccount by $1,000, which will be reflected in the partnership books,the adjusted basis of Sam's interest is only $400 and the adjustedbasis of his partner's interest is $1,000. When determined.The adjusted basis of a partner's partnership interest isordinarily determined at the end of the partnership's tax year.However, if there has been a sale or exchange of all or part of thepartner's interest or a liquidation of his or her entire interest in apartnership, the adjusted basis is determined on the date of sale,exchange, or liquidation. Alternative rule for figuring adjusted basis.In certain cases, the adjusted basis of a partnership interest canbe figured by using the partner's share of the adjusted basis ofpartnership property that would be distributed if the partnershipterminated. This alternative rule can be used in either of the followingsituations. The circumstances are such that the partner cannotpracticably apply the general basis rules. It is, in the opinion of the IRS, reasonable to concludethat the result produced will not vary substantially from the resultunder the general basis rules. Adjustments may be necessary in figuring the adjusted basis of apartnership interest under the alternative rule. For example,adjustments would be required to include in the partner's share of theadjusted basis of partnership property any significant discrepanciesthat resulted from contributed property, transfers of partnershipinterests, or distributions of property to the partners. Effect of Partnership Liabilities A partner's basis in a partnership interest includes the partner'sshare of a partnership liability only if, and to the extent that, theliability: Creates or increases the partnership's basis in any of itsassets, Gives rise to a current deduction to the partnership,or Is a nondeductible, noncapital expense of thepartnership. The term "assets" in (1) includes capitalized itemsallocable to future periods, such as organization expenses. A partner's share of accrued but unpaid expenses or accountspayable of a cash basis partnership are not included in the adjustedbasis of the partner's interest in the partnership. Partner's basis increased.If a partner's share of partnership liabilities increases, or apartner's individual liabilities increase because he or she assumespartnership liabilities, this increase is treated as a contribution ofmoney by the partner to the partnership. Partner's basis decreased.If a partner's share of partnership liabilities decreases, or apartner's individual liabilities decrease because the partnershipassumes his or her individual liabilities, this decrease is treated asa distribution of money to the partner by the partnership. Assumption of liability.A partner or related person is considered to assume a partnershipliability only to the extent that: He or she is personally liable for it, The creditor knows that the liability was assumed by thepartner or related person, The creditor can demand payment from the partner or relatedperson, and No other partner or person related to another partner willbear the economic risk of loss on that liability immediately after theassumption. Related person.A related person, for these purposes, includes all of thefollowing. An individual and his or her spouse, ancestors, and linealdescendants. An individual and a corporation 80% or more in value of theoutstanding stock of which is owned, directly or indirectly, by or forsuch individual. Two corporations that are members of the same controlledgroup. A grantor and a fiduciary of any trust. Fiduciaries of two separate trusts if the same person is agrantor of both trusts. A fiduciary and a beneficiary of the same trust. A fiduciary and a beneficiary of two separate trusts if thesame person is a grantor of both trusts. A fiduciary of a trust and a corporation, 80% or more invalue of the outstanding stock of which is owned, directly orindirectly, by or for the trust or a grantor of the trust. A person and a tax-exempt educational or charitableorganization controlled directly or indirectly by the person or bymembers of the person's family. A corporation and a partnership if the same persons own 80%or more in value of the outstanding stock of the corporation and 80%or more of the capital or profits interest in the partnership. Two S corporations or an S corporation and a C corporationif the same persons own 80% or more in value of the outstanding stockof each corporation. For tax years beginning after August 5, 1997, an executorand a beneficiary of an estate. A partnership and a person owning, directly or indirectly,80% or more of the capital or profits interest in thepartnership. Two partnerships in which the same persons own, directly orindirectly, 80% or more of the capital or profits interests. Property subject to a liability.If property contributed to a partnership by a partner ordistributed by the partnership to a partner is subject to a liability,the transferee is treated as having assumed the liability to theextent it does not exceed the fair market value of the property. Partner's share of recourse liabilities. A partnership liability is a recourse liability to the extent thatany partner or related person, defined earlier, has an economic riskof loss for that liability. A partner's share of a recourse liabilityequals his or her economic risk of loss for that liability. A partnerhas an economic risk of loss if that partner or related person wouldbe obligated (whether by agreement or law) to make a net payment tothe creditor or a contribution to the partnership with respect to theliability if the partnership were constructively liquidated. A partnerwho is the creditor for a liability that would otherwise be anonrecourse liability of the partnership has an economic risk of lossin that liability. Constructive liquidation.Generally, in a constructive liquidation, the following events aretreated as occurring at the same time. All partnership liabilities become payable in full. All of the partnership's assets have a value of zero, exceptfor property contributed to secure a liability. All property is disposed of by the partnership in a fullytaxable transaction for no consideration (except relief fromliabilities for which the creditor's right to reimbursement is limitedsolely to one or more assets of the partnership). All items of income, gain, loss, or deduction are allocatedto the partners. The partnership liquidates. Example.Ted and Jane form a cash basis general partnership with cashcontributions of $20,000 each. Under the partnership agreement, theyshare all partnership profits and losses equally. They borrow $60,000and purchase depreciable business equipment. This debt is included inthe partners' basis in the partnership because incurring it creates anadditional $60,000 of basis in the partnership's depreciable property. If neither partner has an economic risk of loss in the liability,it is a nonrecourse liability. Each partner's basis would include hisor her share of the liability, $30,000. If Jane is required to pay the creditor if the partnershipdefaults, she has an economic risk of loss in the liability. Her basisin the partnership would be $80,000 ($20,000 + $60,000), whileTed's basis would be $20,000. Limited partner.A limited partner generally has no obligation to contributeadditional capital to the partnership and therefore does not have aneconomic risk of loss in partnership recourse liabilities. Thus,absent some other factor, such as the guarantee of a partnershipliability by the limited partner or the limited partner making theloan to the partnership, a limited partner generally does not have ashare of partnership recourse liabilities. Partner's share of nonrecourse liabilities.A partnership liability is a nonrecourse liability if no partner orrelated person has an economic risk of loss for that liability. Apartner's share of nonrecourse liabilities is generally proportionateto his or her share of partnership profits. However, this rule may notapply if the partnership has taken deductions attributable tononrecourse liabilities or the partnership holds property that wascontributed by a partner. See section 1.752-3 of the regulationsfor more information. More information.For more information on the effect of partnership liabilities,including rules for limited partners and examples, see sections1.752-1 through 1.752-5 of the regulations.