Transcript Partner Basis - John J. Masselli, Ph.D

Limitations on the Deduction of
Allocated Losses
 3 Provisions limit the deductibility of partnership
losses



Sec 704(d) - partners may deduct losses only to
the extent of their partnership basis
Sec. 465 - partners may not deduct losses in
excess of his/her at risk amount
Sec. 469 - prohibits individuals and closely held
corporations from deducting PALs in excess of PAI
Section 704(d)
 A partners deduction cannot exceed his/her total
investment including share of debt.
 If allocated share of partnership losses exceeds his/her
basis in the partnership interest  excess does not reduce basis, but is carried
forward indefinitely and may be deducted when the
partner has basis.
 For purposes of this limitation - any distributions made to
the partner during the year are accounted for before the
application of the basis limitation
 The allocation of loss is the last adjustment to basis to be
applied.
At Risk Limitations
 Differs from Sec. 704(d) because most non-recourse
debts are not considered At Risk.
 Partners are generally at risk for their investment in the
partnership + their portion of recourse debt or qualified
non-recourse debt.
 Therefore, losses may be disallowed even though no
Sec. 704(d) limitation exists.
 Qualified non-recourse debt - nonrecourse debt secured
by real estate, which are obtained from a bank, S&L, or
other commercial lender. Excludes seller financed loans,
and non-real estate non recourse loans
At Risk Limitations
Continued
 Sec. 704(d) and Sec. 465 limitations are applied




sequentially
Only losses allowed by Sec. 704(d) can be limited by
Sec. 465.
Where basis and at risk are the same, losses will be
disallowed under Sec. 704(d) only.
Where basis and at risk differ, losses can be disallowed
under both sections
Sec. 465(e) discusses at risk recapture, when at risk
basis is negative (excess distributions or debt reduction),
amount taken into income is typically ordinary income
rather than capital under Sec. 731
Sec 469 - Passive Activity
Loss Limitations
 At Risk Rules and Sec. 704(d) rules are applied on a




partnership by partnership basis.
If a partner cannot take a loss because of the above
limitations, the passive activity loss rules cannot be
applied until the above limitations are lifted.
General rule - passive activity losses are disallowed to
the extent the passive activity losses exceed passive
activity income.
Net disallowed PALs are carried forward to tax years
when PAI is available.
Passive Activities are aggregated to determine the
limitation.
Sec. 469 (continued)
 Passive Activity



TP does not materially participate in the activity
Partner is a limited partner
Partnership is engaged in a rental activity (2 exceptions,
real estate professionals and general partners who
actively participate but make less than $150,000)
 Passive losses disallowed must be allocated to all
passive activities on a pro-rata basis. You cannot choose
which passive activities you want to take the losses from,
etc.
 Suspended passive losses can be taken in the year the
passive activity is disposed by the taxpayer.