Liquidating distribution return of capital

06-Jul-2017 10:35

If a partner receives an inventory item from the partnership, and the partner disposes of the item within 5 years, then he must recognize ordinary gain or loss on the property, regardless of whether it would otherwise be a capital asset.

When a partner receives a property distribution, the holding period for the property is added onto the holding period of the partnership plus the holding period of the partner who contributed the property, if applicable.

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.

The inside basis is the partnership's tax basis in the individual assets.

The outside basis is the tax basis of each individual partner's interest in the partnership.

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No gain is recognized from a distribution of cash or marketable securities that can easily be converted to cash, unless the distribution is more than the partner's outside basis, in which case, the excess is taxable as a capital gain.

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.