Identify cash, deemed cash, outside basis and the special rules before reaching a conclusion.
For a simple cash distribution, § 731 generally recognizes gain when money exceeds outside basis immediately before the distribution. A reduction in the partner’s share of liabilities may be treated as money distributed under § 752(b). Certain marketable securities can also count as money.
Property distributions require additional basis rules. Disproportionate distributions involving hot assets, contributed property and other special situations need their own analysis. A current distribution is not a general opportunity to recognize a loss.
Work through an example
Simplified illustration: $18,000 cash distributed against $15,000 outside basis produces $3,000 gain and leaves no outside basis, assuming no liabilities, other property or special rules. Change the facts and the calculation may change.
Return to the sources
When a distribution triggers gain or loss
Cash, marketable securities and special distribution rules can make an otherwise simple withdrawal complex.
Basis of property received in a distribution
Current and liquidating distributions can produce different bases in the property received.
Outside basis after a distribution
Connect the amount and basis of distributed property to the reduction in the partner’s outside basis.
Unrealized receivables and inventory
The hot-asset rules can change character on a sale or on certain disproportionate distributions.
Partnership liabilities and deemed cash
Changes in a partner’s share of liabilities can create deemed contributions or distributions.
Distribution recognition rules
Read the regulatory examples and cross-references before treating a distribution as tax-free.
First edition: November 15, 2026. Educational scope and current links reviewed for this release. Source text and effective dates control.