Partnership Interest
At the desk
| Outside basis | Cash + basis of property contributed + gain recognized + share of liabilities; then the yearly adjustments |
| Not basis | K-1 item L capital (tax-basis method, excludes liabilities and 743(b)); the book capital account; FMV of what was contributed |
| Cash-basis payables | Not liabilities for basis. Bank debt, mortgages, accrual-basis payables are |
| Purchased | Cost + share of liabilities; Sec. 754 / 743(b) adjusts inside basis for the buyer only; mandatory if built-in loss > $250,000 |
| Inherited / gifted | Inherited: FMV at death + debt share – IRD. Gifted: donor's basis, tacked holding period |
| Trap | Nobody keeps the schedule. Rebuild from the oldest K-1 forward and document the starting point |
On this page
- Partner's Basis 1 note · 1 example
- Partnership's Gain 1 note
- Partnership's Basis 1 note
- Holding Periods 2 notes
- Partner Purchased Interest 6 notes
Outside basis — the partner's basis in the partnership interest — is the number every distribution, loss, and sale is measured against. It is separate from the partner's capital account on the partnership's books and from the K-1 item L figure.
- The original basis of a partner's interest acquired in exchange for contributions of property is the sum of
- The money contributed,
- The adjusted basis (AB) of property contributed, and
- The amount of any recognized gain by the partner under Sec. 721(b) on the contribution (partnership treated as an investment company).
- The assumption of liabilities by the partner is treated as a contribution of money to the partnership and increases basis.
- The amount of liabilities assumed by the partnership is treated as a distribution to the contributing partner and reduces basis.
- A partner's basis in a cash-basis partnership includes liabilities only to the extent that the liability
- Creates or increases the partnership's basis in its assets,
- Gives rise to a current deduction, or
- Gives rise to a nondeductible, noncapital expense of the partnership.
- Accrued but unpaid expenses and accounts payable are not included in the basis of a partner's interest in a cash-basis partnership.
- A partner includes a liability only to the extent that the partner bears the economic risk of loss (recourse) or, for nonrecourse debt, by profit share.
Martin acquired a 30% interest in LMN, a cash-basis partnership, by contributing $15,000 cash and property with an adjusted basis of $113,000, including land subject to a $100,000 mortgage the partnership assumed. LMN also had a $50,000 bank loan and $10,000 of accounts payable. Martin's basis: $15,000 + $113,000 – $70,000 (the other partners' 70% of the mortgage) + $15,000 (his 30% of the bank loan) = $73,000. The accounts payable are ignored.
Partner's Basis
- A partner's basis in contributed items is exchanged for basis in the partnership interest received, adjusted for gain recognized and liabilities.
Three equal partners form a partnership. Baboon contributes $5,000 cash and land with a basis of $4,000; Camel contributes machinery subject to a $6,000 mortgage the partnership assumes. Baboon's basis is $5,000 + $4,000 + $2,000 (one-third of the $6,000 liability) = $11,000.
Partnership's Gain
- The partnership realizes neither gain nor loss when it receives contributions of money or property in exchange for a partnership interest.
Partnership's Basis
- The partnership's basis in contributed property is equal to the contributing partner's AB in the property immediately before contribution, increased by any gain recognized by the partner (Sec. 723). It is not adjusted for liabilities. A building contributed with a $10,000 basis and a $6,000 mortgage is depreciated by the partnership from $10,000.
Holding Periods
- The holding period (HP) of the partner's interest includes the HP of contributed capital and Sec. 1231 assets. If the interest was received in exchange for ordinary income property (inventory, receivables) or services, the HP starts the day following the exchange.
- The partnership's HP in contributed property includes the partner's HP, even if the partner recognized gain.
Partner Purchased Interest
- The basis in a partnership interest purchased from a partner is its cost, which is the sum of the purchase price and the partner's share of partnership liabilities.
- The partnership may elect to adjust the basis in its assets by the difference between the transferee's basis in his or her partnership interest and his or her proportionate share of the partnership's AB in its assets. This is referred to as a Sec. 754 election.
- Section 743 provides that this adjustment to basis will apply only for the transferee partner.
- added 2026 The adjustment is mandatory, election or not, when the partnership has a substantial built-in loss (more than $250,000) at the time of the transfer (Sec. 743(d)). Our step-by-step is on the Sec. 754 footnotes page.
- The partnership may elect to adjust the basis in its assets by the difference between the transferee's basis in his or her partnership interest and his or her proportionate share of the partnership's AB in its assets. This is referred to as a Sec. 754 election.
- An inherited interest takes a basis equal to its fair market value at death plus the successor's share of liabilities, less any income in respect of a decedent (cash-basis receivables, the decedent's undistributed share of income).
- A gifted interest takes the donor's basis (plus gift tax on the appreciation); the donee's holding period includes the donor's.
Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.