7883 / Does depletion affect a limited partner’s tax basis in a partnership interest?

Yes, in two ways. First, a limited partner’s tax basis in the partnership interest is increased by the excess of the deductions for depletion over the basis of the property subject to depletion. (This can occur only when percentage depletion is taken.)¹ However, Treasury Regulation Section1.705-1(a)(2) provides that the previous rule does not apply in the case of oil and gas property the basis of which is allocated to and computed separately by the partners of the partnership owning such property under IRC Section613A(c)(7)(D) (see Q 7872). Second, the limited partner’s tax basis in the partnership interest is reduced (but not below zero) by the amount of allowable depletion deductions for each tax year.² The basis was not reduced due to depletion deductions calculated at the electing large partnership level (see Q 7733).³

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1. IRC § 705(a)(1)(C); Treas. Reg. § 1.705-1(a)(2).

2. IRC § 705(a)(3); Treas. Reg. § 1.613A-3(e)(6)(ii).

3. IRC § 776(a)(3), prior to repeal.