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Treasury Dept. Issues Final Regulations on Related-Party Partnership Basis Shifting

By Ezra Dyckman and Charles S. Nelson
March 01, 2025

A partner’s tax basis in his partnership interest (outside basis) generally represents his economic investment in a partnership plus his share of the partnership’s liabilities. In many cases, a partner’s outside basis will correspond to his share of the partnership’s tax basis in its assets (inside basis). However, there are situations when the two can differ, and various transactions can result in adjustments to the tax basis of a partnership’s property.

If a partnership makes a distribution of property to a partner, the partner generally receives a tax basis in the distributed property equal to the partnership’s inside basis in the property. However, if the partnership’s inside basis in the property was higher than the partner’s outside basis in his partnership interest, the partner’s basis in the distributed property is limited to his outside basis.

In addition, if a partner receives a liquidating distribution of property from a partnership, the partner’s basis in the distributed property will equal his outside basis (reduced by any money received in the same transaction). Therefore, the basis of the distributed property in the hands of the partner may be adjusted to be higher or lower than the partnership’s inside basis in the distributed property.

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