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Whether earnings are retained in a partnership or distributed to partners has no affect on the taxation of those earnings, since the partners have to pay tax on the earnings whether they are distributed or not.
Earnings are distributed to each partner's capital account from which distributions are charged against.
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.
When a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its fair market value (You contribute land to a partnership with a tax basis of $10,000 and a FMV of $50,000. Since the FMV of the land is also $50,000, you each have equal equity in the partnership, and the total inside basis of the partnership is equal to $100,000, your combined contributions.
However, your outside basis differs from your partner's, since your outside basis is $10,000, while that of your partner's is $50,000.
If you sold your partnership interest for $50,000, you would recognize a gain of $40,000, whereas your partner, if she sold at the same price, would recognize no gain.