Once all basis is depleted, including basis from debt, or the debt is repaid, any distributions in excess of basis are taxed as capital gains to the partner receiving them. A distribution in excess of basis refers to the amount of cash or property that a partner receives from a partnership that exceeds their tax basis in the partnership interest.
Reporting Excess Distributions
Generally, if you receive a distribution in excess of your basis, you must report that excess on your individual tax return subject to capital gains tax. Distributions exceeding a partner’s basis are taxed as capital gains. The partner must report the excess distribution on their tax return.
Consequences of Excess Distributions
Earnings kept or distributed do not affect taxation, since partners owe tax either way.
Excess distributions must be reported as income, to avoid underreporting. Misreporting risks penalties or IRS audits.
The complexity resembles a Rubik’s Cube. But understanding is possible.