Do partnership liabilities increase basis?

The short answer and the test

Borrowing at the partnership level can raise your personal basis, which is why a partner can sometimes deduct losses larger than the cash they put in. Publication 541 sets a test. A partner’s basis in a partnership interest includes the partner’s share of a partnership liability only if, and to the extent that, the liability does one of three things: it creates or increases the partnership’s basis in any of its assets, it gives rise to a current deduction for the partnership, or it is a nondeductible, noncapital expense of the partnership. Assets for this purpose include capitalized items allocable to future periods, such as organization expenses.

One carve-out matters for small cash-method businesses: a partner’s share of accrued but unpaid expenses or accounts payable of a cash basis partnership is not included in the adjusted basis of the partner’s interest. Ordinary trade payables do not add basis until they are paid.

Increases are contributions, decreases are distributions

If your share of partnership liabilities goes up, or your individual liabilities go up because you assume partnership liabilities, the increase is treated as a contribution of money by you to the partnership, which raises basis. If your share goes down, or the partnership assumes your individual liabilities, the decrease is treated as a distribution of money to you. A distribution of money larger than your basis produces gain, so a falling share of debt can be taxable even though no cash moves. The same logic appears when a partner sells an interest: the publication says relief of partnership liabilities is part of the amount realized. In its example, Kumar’s basis is $20,000 including a $15,000 share of liabilities; he sells for $10,000 cash, realizes $25,000 with the liability relief, and reports a $5,000 capital gain. If he had withdrawn when his basis was zero, the $15,000 liability relief would itself be a $15,000 capital gain.

Recourse versus nonrecourse

A liability is recourse to the extent any partner or a related person has an economic risk of loss for it. A partner has that risk if the partner or a related person would be obligated, by agreement or by law, to make a net payment to the creditor, or a contribution to the partnership, for the liability if the partnership were constructively liquidated. A partner’s share of a recourse liability equals the partner’s economic risk of loss. A liability is nonrecourse if no partner or related person bears that risk, and a partner’s share of nonrecourse liabilities is generally proportionate to the partner’s share of profits, though the publication warns this may not hold if the partnership took deductions attributable to nonrecourse liabilities or holds property contributed by a partner. The regulations named are Regulations sections 1.752-1 through 1.752-5.

The publication’s Juan and Teresa example

Juan and Teresa form a cash-basis general partnership with $20,000 each and share profits and losses equally. The partnership borrows $60,000 and buys depreciable equipment. Because the borrowing creates $60,000 of basis in the equipment, it counts. If neither partner bears the risk of loss, it is nonrecourse and each partner’s basis includes $30,000. If Teresa must pay the creditor on a default, she bears the risk of loss, so her basis is $80,000 ($20,000 plus $60,000) and Juan’s stays at $20,000. The calculator above uses the same three paths.

What constructive liquidation means

To find who bears the risk, the rules imagine all of the following at once: every partnership liability becomes payable in full; every asset becomes worthless except property contributed to secure a liability; all property is disposed of in a fully taxable transaction for no consideration except relief from liabilities whose creditor can look only to partnership assets; all income, gain, loss and deduction is allocated to the partners; and the partnership liquidates. Whoever would have to write a check at the end of that thought experiment has the economic risk of loss.

Limited partners and related persons

A limited partner generally has no obligation to contribute more capital and so generally has no share of recourse liabilities, unless some other factor applies, such as guaranteeing the debt or lending the money to the partnership. A partner who is the creditor on a liability that would otherwise be nonrecourse has an economic risk of loss in it. A partner or related person is considered to assume a partnership liability only to the extent the person is personally liable, the creditor knows of the assumption, the creditor can demand payment from that person, and no other partner or person related to another partner will bear the economic risk of loss immediately afterward. Related persons include an individual and a spouse, ancestors and lineal descendants, an individual and a corporation of which the individual owns 80% or more by value, and a partnership and a person owning 80% or more of its capital or profits, among others listed in the publication.

Property subject to debt, and LLC conversions

If property contributed by a partner or distributed by the partnership is subject to a liability, the transferee is treated as assuming it to the extent it does not exceed the property’s fair market value. Converting a partnership into an LLC taxed as a partnership does not end the partnership, but if recourse debt becomes nonrecourse the partners share it differently, so bases must be adjusted, and if a partner’s decrease in share of liabilities exceeds basis, the excess is gain.

Sources

• IRS Publication 541, Partnerships (12/2025): Effect of Partnership Liabilities (Partner’s basis increased and decreased, Assumption of liability, Related person, Property subject to a liability, recourse liabilities, Constructive liquidation, Limited partner, nonrecourse liabilities); Terminating a Partnership (Conversion of partnership into LLC); Sale, Exchange, or Other Transfer. Read November 2, 2026.

Edition read: Publication 541 (12/2025), Partnerships, as posted on irs.gov. Rules and dollar amounts can change; check the current publication and the Instructions for Form 1065 for your tax year. This page summarizes the publication and does not replace it. The worked examples with named people are the publication's own; the other examples use made-up numbers to show the arithmetic.