Partner’s Gain or Loss

A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner’s interest in the partnership. Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. If partnership property (other than marketable securities treated as money) is distributed to a partner, they generally don’t recognize any gain until the sale or other disposition of the property.

For exceptions to these rules, see Distribution of part- ner’s debt and Net precontribution gain , later. Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner’s Interest , later.

Example. The adjusted basis of Jo’s partnership interest is $14,000. She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and an FMV

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of $3,000. Because the cash received doesn’t exceed the basis of her partnership interest, Jo doesn’t recognize any gain on the distribution. Any gain on the land will be recognized when she sells or otherwise disposes of it. The distribution decreases the adjusted basis of Jo’s partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)].

Qualified opportunity investment. If you held a qualified investment in a qualified opportunity fund (QOF) at any time during the year, you must file your return with Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, attached. See the Form 8997 instructions.

Marketable securities treated as money. Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. This treatment, however, doesn’t generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner.

The amount treated as money is the security’s FMV when distributed, reduced (but not below zero) by the excess (if any) of:

1. The partner’s distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their FMV immediately before the transaction resulting in the distribution, over

2. The partner’s distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the FMV in (1).

For more information, including the definition of marketable securities, see section 731(c).

Loss on distribution. A partner doesn’t recognize loss on a partnership distribution unless all the following requirements are met.

• The adjusted basis of the partner’s interest in the partnership exceeds the distribution.

• The partner’s entire interest in the partnership is liquidated.

• The distribution is in money, unrealized receivables, or inventory items.

There are exceptions to these general rules. See the following discussions. Also, see Liquidation at Partner’s Retirement or Death under Disposition of Partner’s Inter- est , later.

Distribution of partner’s debt. If a partnership acquires a partner’s debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the FMV of the debt differs from the basis of the debt (determined under the rules discussed under Partner’s Basis for Distributed Property, later).

The partner is treated as having satisfied the debt for its FMV. If the issue price (adjusted for any premium or discount) of the debt exceeds its FMV when distributed, the

partner may have to include the excess amount in income as canceled debt.

Similarly, a deduction may be available to a corporate partner if the FMV of the debt at the time of distribution exceeds its adjusted issue price.

Net precontribution gain. A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution.

The gain recognized is the lesser of the following amounts.

1. The excess of:

a. The FMV of the property received in the distribu tion; over

b. The adjusted basis of the partner’s interest in the

partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution.

2. The net precontribution gain of the partner. This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution and held by the partnership immediately before the distribution were distributed to another partner, other than a partner who owns more than 50% of the partnership. For information about the distribution of contributed property to another partner, see Contribu- tion of Property under Transactions Between Partner- ship and Partners , later.

The character of the gain is determined by reference to the character of the net precontribution gain. This gain is in addition to any gain the partner must recognize if the money distributed is more than their basis in the partnership.

For these rules, the term “money” includes marketable securities treated as money, as discussed earlier under Marketable securities treated as money .

Effect on basis. The adjusted basis of the partner’s interest in the partnership is increased by any net precontribution gain recognized by the partner. Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. See Ba- sis of Partner’s Interest , later.

The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule.

Exceptions. Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner’s net precontribution gain. For this purpose, the partner’s previously contributed property doesn’t include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership.

Recognition of gain under this rule also doesn’t apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as

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a sale or exchange, as discussed earlier under Certain distributions treated as a sale or exchange .