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Posted by / 09-Mar-2016 15:39

Partnership liquidating distributions examples

If you sold your partnership interest for ,000, you would recognize a gain of ,000, whereas your partner, if she sold at the same price, would recognize no gain.

There are 2 types of distributions: a current distribution decreases the partner's capital account without terminating it, whereas a liquidating distribution pays the entire capital account to the partner, thereby eliminating the partner's equity interest in the partnership.

The value of marketable securities, such as stock investments that are traded on a public stock exchange, and decreases to your share of the partnership's debt are both treated as cash distributions.

When the total amount of cash distributed is more than a partner's basis in her partnership interest, the difference in the two amounts is a gain.

When a business operates as a partnership, the partners each report a percentage -- which is usually the same as their percentage of ownership -- of annual earnings on their personal returns.

Instead, gain or loss is delayed until you sell the property.

However, certain types of distributions and any distributions that exceed the partner's basis may result in gains or losses that must be reported for the year in which they occur.

To understand the taxation of partnerships and distributions, it is necessary to know the 2 types of tax bases concerning partnerships.

When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property.

However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded.

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