Transfer assets before liquidating partnership
This item explores the two main methods used when terminating a partnership interest: purchase and liquidation.A terminating partner may sell his or her interest to one or more of the remaining partners, or the partnership may liquidate his or her interest.All payments to a partner in liquidation are treated as either Sec. Payments for goodwill are treated as payments under Sec. 736(a) payments are deductible by the partnership and are ordinary income to the liquidating partner, subject to self-employment tax. 736(b) payments and are considered nondeductible distributions of partnership property.736(b) for all capital-intensive partnerships or where the partnership agreement specifies that terminating payments may be made for goodwill (Sec. A cash-basis partner should be aware that if the partnership accrues a payment to the partner in its tax year, the partner must recognize that income in the same tax year. These payments generally receive capital gain treatment for the liquidating partner.Liquidation may be accomplished using deferred payments.These deferred payments are not taxed to the liquidating partner until the payments received exceed his or her outside basis.754 election to step up the basis of the assets under Secs. However, once the partnership makes the election, it stays in effect for any subsequent sale until the partnership requests the election to be rescinded.The acquiring partners' incremental change in ownership now has a basis equal to FMV. 754 election must be applied to each asset of the partnership.
If the FMV of the partnership assets is greater than their associated tax basis, it is usually advantageous for the partnership to make a Sec.The installment sale rules can also apply if there are multiple payments and at least one payment will be received more than one year from the sale date.