7751 / Is a limited partner taxed on a current cash distribution?
Current cash distributions (i.e., not in liquidation of a partner’s interest) that are not in excess of the partner’s adjusted basis in the partnership interest immediately before the distribution are a nontaxable return of capital.1 The partner’s adjusted basis in the partnership interest is reduced by the amount of such cash distributions.2 See Q 7737.
To the extent that a cash distribution to a partner exceeds the partner’s basis in the partnership interest immediately before the distribution, the partner realizes a gain that is taxed as if there were a sale of a partnership interest.3 See Q 7755. This is true of a current cash distribution or a cash distribution in liquidation of a partner’s interest.4
A decrease in a partner’s share of nonrecourse liabilities is considered, for tax purposes, a cash distribution.5 See Q 7737.Such a decrease can occur when a mortgage is satisfied, a liability is discharged through foreclosure, or the partnership sells property subject to a mortgage. To the extent that such a deemed distribution exceeds the partner’s adjusted basis in the partnership interest, the partner has a taxable gain.6