Example of partnership liquidating distribution
Basis increases with the partner’s share of income and contributions to the partnership.
That allows the partner to receive distributions up to his basis as a tax-free return of capital.
The partnership just assumes the same basis as the partner.
These adjustments to basis work with the rules governing distributions to ensure that partnership income is taxed and deductions are taken only once.
Liquidating a partnership results in a gain or loss depending on how each partner’s distribution compares to his basis.
If the distribution exceeds his basis, he recognizes a gain.
When partners form the business, they might contribute property that has changed in value since they purchased it.
Contributions to the formation of a partnership generally don’t require the partner to recognize any gain or loss.