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In some cases, a partner in a partnership owning troubled real estate may be able to claim a loss on the abandonment of his partnership interest, even if he has a negative capital account. The claiming of a loss will depend on the partner's actions in abandoning the partnership interest and the nature of the partnership debt.
In order to claim a loss for a particular year, the partner must show, among other things, that the property was actually abandoned in that year.
EXAMPLE: A, B and C are partners in partnership ABC, which owns and operates a shopping center. The center is currently in financial difficulty and is expected to remain that way for some time. A wants out and decides to "walk away" from his partnership interest at a time when ABC's tax basis balance sheet is as follows:
(Equation omitted)
A is personally liable on one-third of the debt, or $400. His basis in ABC is $300, consisting of his share of liabilities of $400 less his negative capital account of $100.
A may believe that if he abandons his interest, he will incur a gain of $100, which is his negative capital account. However, this may not be the case.
BACKGROUND
Several recent cases illustrate how a partner may claim a loss under Sec. 165 as the result of abandoning a partnership interest. For an abandonment to occur, there must be (1) an intention to abandon and (2) an affirmative act of abandonment.
The amount of the loss is the taxpayer's basis in the property. Generally, the basis of a partnership interest is the partner's capital account balance increased by the partner's share of partnership liabilities. Therefore, even if a partner has a negative capital account in a partnership, that partner may have a basis that could generate an abandonment loss.
The nature of the loss (ordinary or capital) will depend on whether consideration has been received by the taxpayer at the time of the abandonment. If the taxpayer receives consideration, the loss will generally be a capital loss; if there is no consideration received, the loss will generally be ordinary.
Whether consideration has been received will most likely depend on the nature of the debt on the property abandoned....