Sale, Exchange, or Other Transfer

The sale or exchange of a partner’s interest in a partnership usually results in capital gain or loss. However, see Payments for Unrealized Receivables and Inventory Items , later, for certain exceptions. Gain or loss is the difference between the amount realized and the adjusted basis of the partner’s interest in the partnership. If the selling partner is relieved of any partnership liabilities, that partner must include the liability relief as part of the amount realized for their interest.

Example 1. Kumar became a limited partner in the ABC Partnership by contributing $10,000 in cash on the formation of the partnership. The adjusted basis of his partnership interest at the end of the current year is $20,000, which includes his $15,000 share of partnership liabilities. The partnership has no unrealized receivables or inventory items. Kumar sells his interest in the partnership for $10,000 in cash. He had been paid his share of the partnership income for the tax year.

Kumar realizes $25,000 from the sale of his partnership interest ($10,000 cash payment + $15,000 liability relief). He reports $5,000 ($25,000 realized − $20,000 adjusted basis) as a capital gain.

Example 2. The facts are the same as in Example 1, except that Kumar withdraws from the partnership when the adjusted basis of his interest in the partnership is zero. He is considered to have received a distribution of $15,000, his relief of liability. He reports a capital gain of $15,000.

Installment reporting for sale of partnership interest. A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. For requirements and other information on installment sales, see Pub. 537.

Part of the gain from the installment sale may be allocable to unrealized receivables or inventory items. See Pay- ments for Unrealized Receivables and Inventory Items next. The gain allocable to unrealized receivables and in- ventory items must be reported in the year of sale. The gain allocable to the other assets can be reported under the installment method.