This creates the potential for income recapture of prior at- risk losses under Sec. But the distribution causes the partner's amount at risk to go to negative $100. The partner's basis is reduced to $100 at the end of year 2. Since the distribution did not exceed basis, no gain is recognized under Sec. The partner is allocated no income or loss and $400 of partnership liabilities. The amount at risk at the end of year 1 is zero, and a $200 at- risk loss carryforward is created.Įxample 2:In year 2, the partner receives a distribution of $100. Assume in this example and the following examples that the liabilities do not create at- risk basis for Sec. The mechanical rulesĮxample 1: In year 1, a partner contributes $100 to a partnership and is allocated a $300 loss and $400 of partnership liabilities. However, if a partnership distribution exceeds the amount at risk, the amount at risk becomes negative. If a loss exceeds the amount at risk, the amount at risk is reduced to zero, and the excess creates an at- risk loss carryforward. Unlike the basis rules, however, a partner's at- risk basis can go negative. If a partnership distribution exceeds basis, basis is reduced to zero, and the excess creates taxable gain (Sec. If a loss exceeds basis, basis is reduced to zero, and the excess creates a loss carryforward. 704(d), a partner's basis in its partnership interest can never be negative. Starting with the basis limitation under Sec. 469 and fourth, the excess business loss limitation of Sec. 465 third, the passive activity loss rules of Sec. 704(d) second, the partner's amount at risk under Sec. These rules and the order in which they apply are: first, the adjusted tax basis of the partnership interest under Sec. There are four sets of rules that could disallow all or part of a partner's deduction of an allocable loss from a partnership.

Tax form 1065 example