7750 / Is there a limit on the deduction of a limited partner’s share of partnership losses?

Partnership basis. A partner may not deduct the partner’s share of partnership losses in excess of the partner’s basis in the partnership interest determined as of the end of the partnership year in which the loss occurred (before reduction for the loss). Any excess loss may be deducted at the end of the partnership year in which such excess is repaid to the partnership.¹

In order to apply the limit properly, the partner’s basis is first increased, as explained in Q 7737. Then it is decreased, as explained in Q 7737, by any current distributions and nondeductible expenditures not chargeable to capital, but not by losses for the year (and not by any losses previously disallowed and carried over). If the partner’s losses exceed basis, the partner must allocate basis among the loss items in order to determine how much of each item may be deducted. The partner allocates the basis to each loss in the same proportion as that loss bears to the total loss. (In determining this fraction, the total loss must include the partner’s share of losses for the current year and any disallowed losses carried over from prior years.)²

Example. A partner was allocated the following distributive share of partnership items: long-term capital loss of $5,000; short-term capital gain of $1,000; IRC Section 1231 loss of $3,000; and “bottom line” income of $3,000. Prior to adjustment for any of these items, his adjusted basis in his partnership interest was $2,000. His basis is increased by the short-term gain of $1,000 and bottom line income of $3,000 to $6,000. His total loss is $8,000. His $6,000 basis is allocated 5/8 ($3,750) to long-term capital loss and 3/8 ($2,250) to IRC Section 1231 loss. Thus, he may deduct $3,750 of long-term capital loss and $2,250 of IRC Section 1231 loss. He may carry over a long-term capital loss of $1,250 and an IRC Section 1231 loss
of $750.³

At risk limitation. A partner may not deduct in a year a loss from any activity to the extent the loss exceeds the amount the partner has “at risk” in the activity.⁴ Thus, a limited partner may generally deduct losses of a limited partnership to the extent of basis, but the limited partner may not deduct losses in excess of the amount he or she has “at risk” in the venture if that is less than the basis in his partnership interest. See Q 8003 to Q 8009 on the “at risk” limitation.