If a partner leaves a partnership, what basis is used for taxation?

When a partner leaves a partnership, the taxation of gains or losses is determined through the closing year rules. This concept dictates that the partnership effectively terminates or "closes" its financial ledger for that partner, leading to a final accounting of the partnership's assets and liabilities.

In this scenario, the departing partner must recognize their share of any gain or loss in the partnership’s assets at the time of their exit. This is assessed based on their partnership interest's fair market value compared to their tax basis in that interest. If the value of the partnership has increased and the partner's basis is lower, they would owe taxes on the difference, reflecting capital gains. Conversely, if the basis exceeds the asset value, a loss can be realized.

Understanding the closing year rules helps to accurately determine the tax implications for the partner leaving the partnership, ensuring compliance with tax laws and proper reporting.