What is a nonliquidating distribution for a partnership?
Nonliquidating distributions will generally be nontaxable to the partnership as well as the receiving partner. It is important to know that property distributed in nonliquidating distributions are not to exceed the basis of a partner’s entire interest in the partnership. When a partner’s basis in the partnership is greater than the book value of the asset received no gain is recognized because the partner’s basis in the partnership will be reduced by the book value of the property distributed.
Unlike distributions from corporations, distributions made from partnerships will focus on the asset itself that is being distributed, rather than earnings and profits. The order of distributions from partnerships will first consist of cash distributions, and second property distributions (adjusted basis).
If cash distributed in a nonliquidating distribution, any amount distributed that is in excess of basis will be considered a taxable gain to the receiving partner.
If the property’s book value is less than the book value of the asset received, a limit will exist to the partnership’s basis reduction. The partners remaining basis would then stop at zero.
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How to calculate a nonliquidating distribution in a partnership?
Nonliquidating distributions can be in the form of cash or property. The first step is to always reduce the partner basis in the partnership by the cash distribution. Then, the partners basis is reduced by the basis in the property received. It is important to understand that a partners basis in a partnership can not […]