Distributions
At the desk
| Money | Gain only above outside basis (731), capital; liability relief and marketable securities are money; never a loss |
| Property | Carryover basis, capped at outside basis less money received (732(a)); allocate to receivables/inventory first; decrease to declined assets first |
| 7-year | 704(c)(1)(B): contributor's gain when his property goes to another partner. 737: contributor's gain when he gets other property |
| Hot assets | 751(b): disproportionate receivables or inventory (>120% of basis) = ordinary income. Recapture potential is a receivable |
| Form 7217 | Partner attaches it for every property distribution date, 2024 and later |
| Trap | Refinance proceeds distributed are fine today; the loan paydown later is a deemed distribution with no cash |
On this page
- Current Distributions 3 notes
- Money Distributions 5 notes · 1 example
- Property Distributions 26 notes · 4 examples
- Precontribution Loss 1 note · 1 example
A distribution is a transfer of value from the partnership to a partner in reference to his or her interest in the partnership. A distribution may be in the form of money, liability relief, or other property. A draw is a distribution.
Current Distributions
- A current (or operating) distribution reduces the partner's basis in the partnership interest.
- A decrease in a partner's allocable share of partnership liabilities is treated as a distribution of money.
- added 2026 Marketable securities are treated as money (at FMV) under Sec. 731(c), reduced by the partner's share of the partnership's net gain in securities; an investment partnership is excepted.
Money Distributions
- The partnership recognizes no gain on money distributions.
- A partner recognizes gain only to the extent the distribution (FMV) exceeds the AB in the partnership interest immediately before the distribution.
- Gain recognized is capital gain.
- Basis in the interest is decreased, but not below zero.
- Loss is not recognized.
- A partner recognizes gain only to the extent the distribution (FMV) exceeds the AB in the partnership interest immediately before the distribution.
Nedra's basis is $5,000. She receives a current distribution of $6,000 cash and land with a partnership basis of $2,000. The $1,000 of cash over basis is capital gain; the land takes a zero basis (there is no basis left after the money); her basis in the partnership is zero.
Property Distributions
- Partnership. Generally, no gain or loss is recognized by the partnership when it distributes property, including money.
- Precontribution gain or loss. If property is distributed to a noncontributing partner within 7 years of contribution, the partnership recognizes gain or loss realized to the extent of any unrealized gain or loss, respectively, that existed at the contribution date (Sec. 704(c)(1)(B)).
- Allocate this recognized gain (loss) to the contributing partner.
- The contributing partner's basis in his or her partnership interest is increased.
- Basis in the property is also increased.
- The distributee has a transferred basis.
- Precontribution gain or loss. If property is distributed to a noncontributing partner within 7 years of contribution, the partnership recognizes gain or loss realized to the extent of any unrealized gain or loss, respectively, that existed at the contribution date (Sec. 704(c)(1)(B)).
Betty contributed land with a $6,000 basis and a $10,000 FMV in Year 1. In Year 2 the partnership distributed the land to Sally when it was worth $12,000. Betty recognizes $4,000 of gain (the precontribution gain); the partnership's basis in the land becomes $10,000; Sally takes the land at $10,000 and reduces her outside basis by $10,000.
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- Disproportionate distributions of unrealized receivables or substantially appreciated inventory result in gain recognition (Sec. 751(b)).
- Inventory is considered substantially appreciated if its FMV exceeds 120% of the partnership's adjusted basis.
- Gains from such distributions are taxed as ordinary income.
- added 2026 Unrealized receivables include the depreciation recapture (Sec. 1245 and Sec. 1250) that the partnership would recognize if it sold its assets. A partnership with fully depreciated equipment has hot assets even with no receivables on the books.
- Disproportionate distributions of unrealized receivables or substantially appreciated inventory result in gain recognition (Sec. 751(b)).
- Partner. The distributee partner generally recognizes gain only to the extent that money (including liability relief) exceeds his or her AB in his or her partnership interest.
- However, property distributions made to a partner may cause a partner to recognize any remaining precontribution gain if the FMV of the distributed property exceeds the partner's basis in his or her partnership interest prior to the distribution (Sec. 737). The gain recognized is the lesser of
- The remaining precontribution gain or
- The excess of the FMV of the distributed property over the adjusted basis of the partnership interest immediately before the property distribution (but after any reduction for any money distributed at the same time).
- However, property distributions made to a partner may cause a partner to recognize any remaining precontribution gain if the FMV of the distributed property exceeds the partner's basis in his or her partnership interest prior to the distribution (Sec. 737). The gain recognized is the lesser of
Bob contributed investment land with a $14,000 basis and $20,000 FMV for a 20% interest in Year 1. In Year 3, with a $35,000 outside basis, he receives machinery with a partnership basis of $34,000 and FMV of $37,000. Under Sec. 731 alone there is no gain. Under Sec. 737 he recognizes $2,000: the lesser of his $6,000 remaining precontribution gain or the $2,000 excess of the machinery's FMV over his outside basis.
- The partner's basis in the distributed property is the partnership's AB in the property immediately before distribution, but it is limited to the distributee's AB in his or her partnership interest minus any money received in the distribution (Sec. 732(a)).
- When the above limit applies, allocate basis first to unrealized receivables and inventory, up to the partnership's AB in them, and second to other (noncash) property.
- If the available basis is too small, the decrease (Partnership basis in assets – Basis in partnership interest) is allocated to the assets. The decrease is allocated by the following steps:
- Assign each asset its partnership basis.
- Calculate the decrease amount.
- Allocate the decrease first to any assets that have declined in value, to the extent of the decline.
- Allocate any remaining decrease to the assets based on relative adjusted basis at this point in the calculation.
Karen has a $6,000 basis immediately before a current distribution of $5,000 cash, a computer (FMV $1,500, partnership basis $4,000) and a desk (FMV $500, partnership basis $1,500). Basis to allocate after the cash: $1,000. Partnership basis in the two assets: $5,500; decrease needed: $4,500. Step 1, decline in value: computer $2,500, desk $1,000. Step 2, the remaining $1,000 decrease by relative adjusted basis after step 1 ($1,500 and $500): computer $750, desk $250. Karen's basis: computer $750, desk $250.
Stan's basis is $15,000. He receives $6,000 cash and property with a partnership basis of $11,000 in a current distribution. His basis in the property is $9,000 ($15,000 – $6,000), not $11,000. The $2,000 of basis the partnership had in the property is lost unless a Sec. 754 election is in effect, in which case the partnership steps up its remaining assets by $2,000 under Sec. 734(b).
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- The partner's holding period in the distributed property includes that of the partnership.
- The partner's basis in his or her ownership interest in the partnership is reduced by the amount of money and the AB of property received in the distribution.
- added 2026 Form 7217 must be attached to the partner's return for every distribution date on which property other than money was received, for tax years beginning in 2024 and later. It reports the partnership's basis, the limitation, any Sec. 732(c) allocation and any Sec. 734(b) adjustment.
Precontribution Loss
- A contributed asset with a built-in loss keeps that loss with the contributing partner (Sec. 704(c)), and if the partnership sells it within 5 years the built-in loss is capital to the extent it would have been capital to the partner (Sec. 724(c)).
Jim contributed land with a $15,000 basis and $10,000 FMV to a two-partner partnership; his capital account was credited $10,000. The partnership later sold the land for $8,000. The $7,000 loss is allocated $5,000 (the precontribution loss) plus $1,000 (half the post-contribution loss) to Jim, and $1,000 to the other partner.
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.