20.2 Partner's Outside Basis and Partnership Liabilities
Key Takeaways
- Outside basis starts with contributions (cash plus the adjusted basis of contributed property under §722) and is adjusted under §705 for the partner's share of income, losses, and distributions.
- Under §752, an increase in a partner's share of partnership liabilities increases outside basis as a deemed contribution; a decrease is a deemed cash distribution.
- Recourse liabilities are shared by who bears the economic risk of loss; nonrecourse liabilities are typically shared according to the partners' profit-sharing ratio.
- A money distribution in excess of outside basis triggers gain under §731; outside basis cannot go negative.
- Increase outside basis for income and for liability-share increases before decreasing it for distributions and losses.
20.2 Partner's Outside Basis and Partnership Liabilities
REG Area V, Group D, Topic 2 asks you to calculate the partner's basis in the partnership resulting from business operations, cash contributions, cash distributions, and changes in existing partnership liabilities. This is an application skill. Ordinary income and separately stated items that feed the income increase were computed in Section 20.1. S corporation stock and debt basis — a different statute, with no basis for entity-level liabilities — is Section 19.3. Whether a basis-allowed loss is then limited by at-risk or passive-activity rules is Section 16.1.
Outside basis is the partner's basis in the partnership interest. It controls how much loss the partner may currently deduct, whether a distribution is tax-free, and gain or loss on a sale of the interest. Inside basis is the partnership's basis in its assets. This section computes outside basis. Inside basis matters for partnership-level depreciation and gain; REG Core will not ask you to layer a full §704(c) allocation on top of a simple outside-basis stem.
Contributions and §721
Under §721, a partner generally recognizes no gain or loss on a contribution of property solely in exchange for a partnership interest. §722 sets the partner's initial outside basis at the amount of cash contributed plus the partner's adjusted basis in contributed property. The partnership takes a carryover inside basis in the property. Services contributed for an interest are not §721 property; the partner has ordinary income, and outside basis equals the amount included. Gain can still appear if the partner receives boot or is relieved of liabilities in excess of remaining basis — those are §752 / §731 problems, not a repeal of §721.
The outside-basis rollforward
After formation, §705 (and the distribution rules of §733 and §731) adjust outside basis each year. REG expects a fixed order. The order exists so that current-year income and liability-share increases provide basis before distributions and losses try to take it away.
- Begin with outside basis at the start of the year (or immediately after a contribution).
- Increase for additional contributions of cash and for the adjusted basis of contributed property.
- Increase for the partner's share of taxable income, including separately stated income items, and for the partner's share of tax-exempt income.
- Increase for any increase in the partner's share of partnership liabilities (§752 — treated as a deemed cash contribution).
- Decrease (not below zero) for money distributions, including decreases in the partner's share of liabilities (deemed cash distributions), then for the partnership's basis in distributed property.
- Decrease (not below zero) for the partner's share of nondeductible expenses that are not capitalizable, then for the partner's share of losses and deductions, including separately stated losses and §179.
Outside basis cannot go negative. A money distribution (actual cash, and a liability-share decrease) in excess of remaining outside basis causes the partner to recognize gain under §731, generally capital gain. The excess is not a deductible loss, not ordinary compensation, and not a loan unless the facts actually create a loan. After a gain-triggering money distribution, outside basis is zero. Losses in excess of remaining basis are suspended until additional basis appears.
§752: partnership liabilities
A partner's share of partnership liabilities is part of outside basis. That is the feature that most often distinguishes partnership basis from S corporation stock basis. An increase in the partner's share is a deemed contribution. A decrease is a deemed cash distribution and can trigger §731 gain if it exceeds remaining basis.
| Liability type | Who shares it (REG-typical) |
|---|---|
| Recourse — a partner would have to pay if the partnership did not | Shared according to who bears the economic risk of loss. General partners typically. A limited partner or LLC member shares recourse only to the extent that partner guarantees or otherwise bears that risk. |
| Nonrecourse — no partner bears the economic risk of loss (a typical third-party mortgage on partnership property) | Shared according to the partners' profit-sharing ratio. Limited partners and LLC members do get basis for nonrecourse liabilities. |
The regulations under §752 are more elaborate than that two-row table (partner nonrecourse debt, minimum-gain chargebacks). REG Core uses the table. Do not allocate a general-partnership bank line that the general partners must pay equally to a limited partner who did not guarantee it, and do not deny a limited partner a share of a nonrecourse mortgage merely because the partner has limited liability under state law.
An S corporation shareholder does not include a share of entity liabilities in stock basis. Debt basis exists only for amounts the shareholder actually loans to the S corporation. Importing §752 into an S corporation stem is a designed trap.
Worked: beginning basis $20,000
Facts. Partner P's outside basis at the beginning of the year is $20,000. During the year P is allocated $8,000 of partnership income (ordinary and separately stated income combined; no separately stated loss). P's share of an existing partnership mortgage increases by $15,000. The partnership distributes $10,000 cash to P. No other contributions, losses, or liability changes.
| Step | Amount |
|---|---|
| Beginning outside basis | $20,000 |
| Share of income | 8,000 |
| Increase in share of liabilities (§752) | 15,000 |
| Subtotal before the distribution | 43,000 |
| Cash distribution | (10,000) |
| Ending outside basis | $33,000 |
The $10,000 cash does not exceed basis after the income and liability increases, so no §731 gain. Ending basis is not $18,000 (that figure forgets the $15,000 liability increase: $20,000 + $8,000 − $10,000). It is not $25,000 (that figure forgets the $8,000 of income). It is not $43,000 (that figure forgets to reduce for the cash). It is not $13,000 (subtracting the mortgage increase as if it were a distribution).
If the cash distribution had been $50,000 instead of $10,000, the subtotal of $43,000 would support only $43,000 of money. P would recognize $7,000 of §731 gain, and ending basis would be zero. That is the excess-distribution rule the Blueprint expects you to have in hand even when the numbers in front of you do not trigger it.
If the $15,000 had been a decrease in P's share of liabilities rather than an increase, it would stack with the $10,000 cash as a $25,000 deemed-and-actual money distribution. Applied to $20,000 + $8,000 = $28,000 of pre-distribution basis, P would have remaining basis of $3,000 and no gain. Applied before the income increase, the same decrease would have looked like a gain — which is why the order is not optional.
Partner P begins the year with $20,000 of outside basis, is allocated $8,000 of partnership income, is allocated a $15,000 increase in the partner's share of a partnership mortgage, and receives a $10,000 cash distribution. There are no losses. What is P's ending outside basis?
How do partners share partnership liabilities for §752 outside-basis purposes on a typical REG stem?
A partner's outside basis, after current-year income and liability-share increases, is $12,000. The partnership then distributes $19,000 of cash to the partner. No property is distributed. What is the result?