In a partnership, when are capital account and outside basis the same

The gain's the same, $3K. Whenever a partner's tax basis in a partnership interest includes a share of the partnership's debt, the amount realized [selling price] from a sale of that partnership interest will include the amount of the partnership's debt that is included in the partner's tax basis. The tax rules consider the partner's share of the partnership debt to be "relieved" in the sale and therefore it gets included in the selling price. Sort of like debits and credits, you can't have one without the other.

So if you invested 10k for 5% of a partnership, and the partnership took on liabilities and your share of the liabilities is 1k, and the partnership made 2k in profit, then would the capital account be 11k or 12k? The rule at

suggestit will be 11k because Additions to Basis: Taxable income of partnership including capital gains. Capital Accounts: This represents the partners? share of partnership equity (partnership assets minus partnership liabilities).

But above sentence seems to contradict a sentence later in the same paragraph "The capital account does not include a partner?s share of partnership liabilities". So the question is whether the capital account needs to decrease by 1k to include the partner's share of liabilities.

When the partnership borrows a bunch of money its cash account goes up by the amount borrowed and its liabilities also go up by the same amount and ... and there's no effect on the partnership's net assets or on the partner's *capital account*. However, since a partner's

*tax basis* in his partnership interest is - by definition - his tax basis in his capital account *plus* his share of the partnership's liabilities, the partner's tax basis increases by his share of the partnership's liabilities, which is $1,000 in your example.

And when the partner sells his interest in the partnership, his proceeds and his tax basis are *both* higher by his share of the partnership's liabilities, again this is by definition. The partner's capital account doesn't move, in your example, except for his share of the K-1 income, $2K.

Capital account: $10K plus $2K income = $12K. Tax basis: $10K plus $2K income plus $1K share of debt = $13K. On the sale: Proceeds are $15K of cash plus $1K of debt relief $16K, and tax basis is $12K (capital account) plus $1K (share of debt) = $13K. Proceeds less basis ($16K - $13K) = taxable gain = $3K.

If the partner's interest sells for $15K cash, it doesn't make any difference if, or how much, the partnership may have borrowed: The gain will be the same. For tax purposes, you don't really have to look inside the partnership, not even peek, to see the assets and liabilities of the partnership; when it's time for a sale, the computation of gain is all taken care of by reference to the partner's "outside" basis, which includes a share of the partnership's debts, since that same share of debt amount is included in the amount realized by the partner on the sale of the his interest.

I hate examples; they always have to be *right*...

This kind of makes sense. In my example, he originally contributed

10k to the partnership, and because the partnership borrowed money, his capital account is still 10k, but his tax basis is 11k. So if he sells his partnership for 10k now, he has a loss of 1k?

This doesn't make sense to me. In my original post, I said the partnership interest was sold for 15k. Are you saying that the interest should have been sold for 16k? That means anytime we sell out partnership interest, we should look at our capital account, and add our share of the partnership's liabilities, to determine the minimum price we should sell at.

Yeah, but sometimes it's the only way to figure out what's going on.