A client, an individual, is a 50% limited partner in Partnership XYZ. Their adjusted basis in the partnership interest is $40,000. Their share of partnership nonrecourse liabilities is $60,000. In the current year, the partnership incurs a $120,000 ordinary loss. Assuming no other limitations apply, what is the maximum amount of loss Partner A can deduct?
- A$100,000
- B$40,000
- C$0
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: D. $60,000
A partner's deductible loss is limited to their adjusted basis. Partner A's basis before losses is $40,000 (initial basis) + $60,000 (share of nonrecourse liabilities) = $100,000. Their share of the $120,000 ordinary loss is 50%, or $60,000. Since $60,000 is less than their $100,000 basis, the full $60,000 loss is deductible. The 'at-risk' rules for nonrecourse debt don't apply to the extent of the qualified nonrecourse financing, but here the full economic basis including nonrecourse liabilities is relevant for the initial basis limitation.
Why the other options are wrong
- A. Incorrect. This is the partner's total basis, but their share of the loss is only $60,000.
- B. Incorrect. This ignores the increase in basis from nonrecourse liabilities.
- C. Incorrect. The partner has sufficient basis to deduct a portion of the loss.
Partnership Loss Basis Limitation
A partner's deductible share of partnership losses is limited to their adjusted basis in the partnership interest. Basis includes their share of partnership liabilities.
- Basis includes both recourse and nonrecourse liabilities (with specific rules for each)
- Losses disallowed by basis limitation are carried forward indefinitely
- Other limitations (at-risk, passive activity) apply after basis limitation
Memory trick: Losses flow through, but basis is king; then at-risk, then passive, the whole thing.