New Reporting Requirement for Property Distributions

In August, the Internal Revenue Service (IRS) released a draft of a new form intended for partners to report their tax basis in property distributed by a partnership. This form, which was updated in December, is expected to be applicable for the 2024 tax year.

The new draft Form 7217, Partner’s Report of Property Distributed by a Partnership, will collect information such as the partnership’s basis in the property before distribution, the fair market value of the distributed property, and any special basis adjustments that may apply.

The new reporting requirement for property distributions will have a more pronounced impact on real estate partnerships due to the inherent complexity, frequency of transactions, significant tax implications, and increased administrative burden.

Computing a partner’s basis

Section 732 provides the rules for computing a partner’s basis in property distributed from a partnership.

For non-liquidating distributions, the partner’s basis in the property is generally equal to the partnership’s pre-distribution basis in the property but may not exceed the partner’s pre-distribution basis in its partnership interest (outside basis).

For liquidating distributions, the partner’s basis in the property received is generally equal to the partner’s outside basis at the time of the distribution. The partner must first reduce the basis of their partnership interest by the amount of money distributed in the same transaction.

IRS’s ongoing efforts

The new draft Form 7217 is part of the IRS's ongoing efforts to collect more detailed information from partnerships and their partners. Recent examples include the introduction of Schedules K-2 and K-3, tax basis capital reporting requirements, and the latest focus on "basis shifting" transactions.

How CLA can help

While the new form may introduce added compliance burdens, it is important to note that the required information is typically already considered when calculating the basis in distributed property. Taxpayers should keep an eye on any updates to Form 7217 before it is finalized. Stay tuned for further developments.