Basis of Partner's Interest

Figures: tax year 2026

A partner's basis schedule tracks outside basis, the adjusted tax basis of that partner's partnership interest. Contributions, allocated income, distributions, losses and changes in allocated liabilities determine the balance, which cannot fall below zero.

Three other measurements require separate records:

• Inside basis: the partnership's adjusted tax basis in each asset. An ordinary property contribution generally carries the contributor's adjusted basis into the partnership.
• Capital account: the partner's equity account under the applicable book or tax capital method. Even tax capital excludes allocated partnership liabilities and may require other adjustments to reconcile with outside...
• Fair market value: the property's current exchange value. Appreciation can affect economic ownership and debt allocation without creating an equal outside-basis increase.

An ordinary contribution of noncash property generally produces no immediate gain or loss. The contributor adds the property's adjusted tax basis and any cash contributed to outside basis, preserving unrecognized appreciation.

Supporting documentation separates the property's adjusted basis, fair market value and encumbering debt. The partnership's assumption of debt creates deemed cash relief, while the contributor's properly allocated share of partnership...

Common mistakes

• Ownership substituted for tax basis. In the review example, $40\% \times (\$50{,}000 + \$75{,}000)$ produces the draft's $50,000 contribution row; Lena's own property basis is $20,000.
• Profit percentage substituted for exposure. Applying Nola's $40\%$ profit interest to $80,000 debt produces $\$80{,}000 \times 40\% = \$32{,}000$, overstating the supported $20,000 allocation by $\$32{,}000 - \$20{,}000 = \$12{,}000$.
• Entire nonrecourse debt shared mechanically. Mara's $\$210{,}000 \times 40\% = \$84{,}000$ shortcut misses the tier allocations supporting $102,000.

Bottom line

• Outside basis is the individual partner's tax basis and differs from inside basis, capital accounts and fair value.
• Ordinary property contributions add adjusted tax basis; liability assumptions require full relief less the contributor's supportable allocated debt share.
• Recourse debt follows ultimate economic exposure after reimbursement rights, while nonrecourse debt follows three allocation tiers.
• Funded partner loans create separate receivable basis and partnership liability allocations without a duplicate capital contribution.

Exam shortcut

Mark each supplied amount as adjusted basis, fair value, principal, interest or ownership percentage before calculating. For contributed debt, place full liability relief and the supported allocation on separate lines. Test gain only after netting that transaction's liability movements. For nonrecourse debt, identify minimum gain and contributed-property gain before reaching for the profit percentage.

The full lesson (about 6,094 words, 41 min read) adds 6 worked examples, all 6 common mistakes, a self-check, free in the app.

Learning objectives

• II.C1

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