Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Question

Quizplus · Accepted Answer

Harry can only deduct a loss up to his basis in the partnership. After the $8,000 loss, his basis would be reduced to $2,000. The $4,000 distribution exceeds his remaining basis by $2,000, which would be recognized as a gain, but he cannot deduct the full $8,000 loss.

Harry's Basis in His Partnership Interest Was $10,000 at the Beginning