Example of partnership liquidating distribution

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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.

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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.

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