6. Partner X of the XYZ equal partnership has a total basis in her partnership i

Question

6. Partner X of the XYZ equal partnership has a total basis in her partnership interest of $30,000. The partnership has $21,000 of nonqualified nonrecourse debt, and no recourse debt. XYZ has a current ordinary loss of ($120,000). X does not materially participate in XYZ, and also has another passive activity for which her share of the income for the year is $5,000. How much X’s share of the XYZ loss is deductible, and how much and at what level (basis, at-risk amount, passive activity loss) are X’s carryovers to the next year?

Explanation / Answer

Nonrecourse debt undertaken by a partnership increases both the general and limited partners’ bases in their partnership interests in their profit sharing ratio.

X's basis in her interest = $30,000 + (50% x $21,000)] = $40,500

X is at risk, however, for only her $30,000 investment. Her share of the partnership loss $60,000 ($120,000 x 50%) reduces her basis and her at-risk amount to $0.

She can deduct only $5,000 of loss, however, because this is a passive investment and she must have passive income against which to deduct the loss.

X's carryovers to the next year are $35,500 at the level of basis.

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