A partner’s outside basis is the tax basis in their partnership interest. It begins with the adjusted basis of contributed property plus cash and includes the partner’s share of partnership liabilities. Outside basis determines loss limits, distribution treatment, and gain or loss when the interest is sold or redeemed. Each partner maintains their own basis record.
Increases to Outside Basis
- Additional contributions — cash or property contributions increase basis.
- Share of income — taxable and nontaxable income increases basis.
- Liability increases — an increase in a partner’s share of partnership liabilities is treated as a contribution of money.
- Depletion adjustments — depletion in excess of basis (except oil and gas with allocated basis) increases basis.
Decreases to Outside Basis
- Distributions — money or property distributions reduce basis but not below zero.
- Share of losses — deductible and capital losses reduce basis.
- Nondeductible expenses — nondeductible, noncapital expenses reduce basis.
- Oil and gas depletion — depletion deductions reduce basis up to the partner’s allocated basis in the wells.
Partnership Liabilities and Basis
A partner’s share of partnership liabilities is included in outside basis when the liability increases the partnership’s basis in assets, produces a deductible expense, or produces a nondeductible, noncapital expense.
If property is contributed subject to a liability, the transferee is treated as assuming the liability up to the property’s fair market value. Liability increases are treated as contributions; liability decreases are treated as distributions.
Recourse Liabilities
A liability is recourse when a partner or related person bears the economic risk of loss. A partner is considered to bear the risk if they would be required to make a payment if the partnership were liquidated. Recourse liabilities increase outside basis and amount at risk.
Nonrecourse Liabilities
A liability is nonrecourse when no partner or related person bears the economic risk of loss. The creditor’s only remedy is foreclosure on the property. Nonrecourse liabilities increase outside basis but generally do not increase the amount at risk.
A partner who guarantees a nonrecourse liability or makes a direct loan becomes economically at risk, and the liability is allocated to that partner.
Qualified Nonrecourse Financing
Qualified nonrecourse financing increases the amount at risk. It must be secured by real property used in the activity and must be borrowed from a government agency or a qualified lender regularly engaged in lending. No person may be personally liable for repayment.