The basis of property (other than money) received by a partner in a distribution from a partnership, other than in liquidation of his entire interest, shall be its adjusted basis to the partnership immediately before such distribution.
However, the basis of the property to the partner shall not exceed the adjusted basis of the partner's interest in the partnership, reduced by the amount of any money distributed to him in the same transaction.
Where a partnership distributes property (other than money) in liquidation of a partner's entire interest in the partnership, the basis of such property to the partner shall be an amount equal to the adjusted basis of his interest in the partnership reduced by the amount of any money distributed to him in the same transaction.
Application of this rule may be illustrated by the following example: Partner B, with a partnership interest having an adjusted basis to him of ,000, retires from the partnership and receives cash of ,000, and real property with an adjusted basis to the partnership of ,000 and a fair market value of ,000.
Each partner has a tax basis in the partnership, determined by the amount of after-tax value he’s contributed to the partnership.
Next the partnership uses the cash it made from the sale of its assets and the remaining cash in its bank account to pay off all remaining liabilities.
Other times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors.
Either way, the partnership liquidation process is similar.
He receives a current distribution of ,000 cash and property with an adjusted basis to the partnership of ,000.
The basis of the distributed property to partner R is limited to ,000 (,000, the adjusted basis of his interest, reduced by ,000, the cash distributed).