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You will not incur any taxable gain on a distribution of
property other than cash or marketable securities from your
partnership, regardless of the value of the property distributed.
Cash or marketable securities distributions can result in
gain, but only if, and to the extent, the cash or the value
of the marketable securities distributed is greater than your
basis in your interest. In most cases, the gain is capital
gain.
Distributions do have an impact on the basis in your partnership
interest. Cash or marketable securities distributions reduce
your basis by the amount of cash or the value of the marketable
securities distributed (but not below zero). Other property
distributions reduce your basis by the amount of basis you
receive in the distributed property.
The basis you receive in distributed property (other than
marketable securities), with one exception, is the same basis
the partnership had in it. The exception applies when this
figure is larger than your basis in the partnership interest
(reduced by any cash or the value of or marketable securities
distributed). In this case, the basis you get in the property
received is the basis you had in your interest.
Planning point:
Since property distributions reduce the basis in your interest,
as described above, you should take your cash or marketable
securities distributions concurrently with (or before) your
property distributions. In this fashion, you may be able to
avoid or reduce the gain on the cash distribution.
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 Example:
Paul has a $10,000 basis in his partnership interest and will
be receiving a $6,000 cash distribution plus real estate with
a value and basis to the partnership of $5,000. If the cash
is distributed with or before the asset, Paul will have no
gain because the cash does not exceed Paul's basis in his
interest. (The cash reduces his basis to $4,000, however,
which becomes his basis in the asset.) If the real estate
is distributed first, Paul gets a $5,000 basis in it (same
as the partnership's) but it reduces his basis in his interest
from $10,000 to $5,000. In this case, the $6,000 cash distribution
causes him to recognize gain of $1,000.
Planning point:
While noncash nonmarketable securities property distributions
trigger no gain, consider the basis implications when deciding
on the property you'd prefer to receive. A high-basis property
will benefit you if you're planning to sell it soon. The high
basis will reduce your gain or generate a loss on the sale.
On the other hand, the high basis in the property reduces
the basis in your partnership interest more. This can cause
you to realize more gain on later cash distributions and can
limit the amount of loss you can deduct from partnership operations
(your deductible partnership losses are limited to your basis
in your interest). Accordingly, in selecting the property
to receive, consider whether you'd benefit from having more
basis in the property or in your partnership interest. You
may be able to control your basis picture.
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