If you sold your partnership interest for ,000, you would recognize a gain of ,000, whereas your partner, if she sold at the same price, would recognize no gain.

However, certain types of distributions and any distributions that exceed the partner's basis may result in gains or losses that must be reported for the year in which they occur.

To understand the taxation of partnerships and distributions, it is necessary to know the 2 types of tax bases concerning partnerships.

Generally, the carryover basis of each property will be equal to the partnership's basis in the property, but since the total of the property basis cannot be greater than the partner's outside basis minus any money received, then any excess basis must be allocated among the properties.

Basis must 1 be allocated to unrealized receivables and inventory items.

So if a partner contributed property, with a holding period of 1 year, to the partnership, and the partnership held the property for 2 years, then a distribution of that property to another partner would result in a carryover holding period of 3 years to the receiving partner.

If several properties are distributed to a partner, then basis must be allocated to the individual properties.

Capital Gain = Cash Distribution – Partner's Outside Basis Distributions are generally made throughout the year, but they are taken into account on the last day of the partnership's tax year.

To minimize capital gains on distributions that may be greater than a partner's equity, the basis is 1 increased by the amount of income earned during the year, then it is decreased by any distributions: any excess distribution over the partner's basis is taxable as a capital gain.

If any part of the distribution is greater than a partner's basis in the partnership, then the excess is treated as a capital gain.

If a distribution consists of unrealized receivables or substantially appreciated inventory items, defined as having a FMV exceeding 120% of the partnership's adjusted basis for the property, then the exchange may be treated as a sale or other taxable exchange, unless the partner contributed the property or the distribution was a distributive share or guaranteed payment to a retiring partner or a deceased partner's successor in interest.

The book gain or loss on the constructive sale is apportioned to each of the partners' accounts.