Question: Sandra, a partner in TRX, LLC, received a Schedule K-1 (Form 1065) with $45,000 in Box 19, Code C. The instructions for this current distribution indicate that this is the partnership’s adjusted basis of property immediately before it was distributed to Sandra. Besides the adjusted basis, what does her tax preparer need to know to complete the new Form 7217, Partner’s Report of Property Distributed by a Partnership, that should be filed with her Form 1040, U.S. Individual Income Tax Return?
Answer: Sandra and her preparer also need to know her outside basis in the partnership so it can be compared to the adjusted basis of the property reported on Schedule K-1. The fair market value of the property on the distribution date is also required to complete the form.
Form 7217, as it applies to current distributions, is a new form (2024) that reports the adjusted basis of property distributed from a partnership to a partner. Although a cash distribution in excess of outside basis may result in immediate gain recognition, current distributions of noncash property (such as real estate or equipment) generally do not cause either the partner or the partnership to recognize gain or loss on the distribution.
Instead, the partner’s basis in the distributed property cannot be more than the partner’s outside basis before the distribution (reduced by any cash distributions). Thus, the partnership’s adjusted basis in the property carries over to the partner to the extent of the partner’s outside basis so that recognition of gain or loss is deferred.
In other words, a partner’s basis in the distributed property is the smaller of:
- The partnership’s adjusted basis immediately before the distribution, or
- The adjusted basis of their partnership interest (outside basis) reduced by any cash distributed in the same transaction.
The partner may recognize gain or loss at a later time, such as when they dispose of the property [§732(a)].
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.