Adjusted Basis

Tip: There is a worksheet for adjusting the basis of a partner’s interest in the partnership in the Partner’s Instructions for Schedule K-1 (Form 1065).

The basis of an interest in a partnership is increased or decreased by certain items.

Publication 541 (12-2025) 13

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, partnership liabilities.

• The partner’s distributive share of taxable and nontaxable partnership income.

• The partner’s distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners.

Decreases. The partner’s basis is decreased (but never below zero) by the following items.

• The money (including a decreased share of partnership liabilities or an assumption of the partner’s individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership.

• The partner’s distributive share of the partnership losses (including capital losses).

• The partner’s distributive share of nondeductible partnership expenses that are not capital expenditures. This includes the partner’s share of any section 179 expenses, even if the partner cannot deduct the entire amount on their individual income tax return.

• The partner’s deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner.

• A partner’s distributive share of foreign taxes paid or accrued by the partnership for tax years beginning after 2017.

• A partner’s distributive share of the adjusted basis of a partnership’s property donation to charity.

Note: If the property’s FMV exceeds its adjusted basis, a special rule provides that the basis limitation on partner losses does not apply to the extent of the partner’s distributive share of the excess for tax years beginning after 2017.

Partner’s liabilities assumed by partnership. If contributed property is subject to a debt or if a partner’s liabilities are assumed by the partnership, the basis of that partner’s interest is reduced (but not below zero) by the liability assumed by the other partners. This partner must reduce their basis because the assumption of the liability is treated as a distribution of money to that partner. The other partners’ assumption of the liability is treated as a contribution by them of money to the partnership. See Ef- fect of Partnership Liabilities, later.

Example 1. Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. The partnership assumed payment of the mortgage. The basis of Ivan’s interest is:

Adjusted basis of contributed property . . . . . . . . . . . . . $8,000

Minus: Part of mortgage assumed by other partners (80% (0.80) × $4,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200

Basis of Ivan’s partnership interest . . . . . . . . . . . . . . . $4,800

Example 2. If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan’s partnership interest would be zero. The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. However, this gain wouldn’t increase the basis of his partnership interest.

Book value of partner’s interest. The adjusted basis of a partner’s interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account.

Example. Enzo contributes to his partnership property that has an adjusted basis of $400 and an FMV of $1,000. His partner contributes $1,000 cash. While each partner has increased his capital account by $1,000, which will be reflected in the partnership’s books, the adjusted basis of Enzo’s interest is only $400 and the adjusted basis of his partner’s interest is $1,000.

When determined. The adjusted basis of a partner’s partnership interest is ordinarily determined at the end of the partnership’s tax year. However, if there has been a sale or exchange of all or part of the partner’s interest or a liquidation of their entire interest in a partnership, 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 can be figured by using the partner’s share of the adjusted basis of partnership property that would be distributed if the partnership terminated.

This alternative rule can be used in either of the following situations.

• The circumstances are such that the partner cannot practicably apply the general basis rules.

• It is, in the opinion of the IRS, reasonable to conclude that the result produced will not vary substantially from the result under the general basis rules.

Adjustments may be necessary in figuring the adjusted basis of a partnership interest under the alternative rule. For example, adjustments would be required to include in the partner’s share of the adjusted basis of partnership property any significant discrepancies that resulted from contributed property, transfers of partnership interests, or distributions of property to the partners.