Inside Basis vs Outside Basis in a Partnership
Inside and outside basis measure different things and can diverge.
Inside basis
Inside basis is the partnership's tax basis in its underlying assets.
Outside basis
Outside basis is an individual partner's tax basis in the partnership interest.
Why they differ
Contributions, distributions, liabilities, purchases of partnership interests, and special basis adjustments can create differences.
Exam strategy
Ask whose basis the question wants: partnership asset basis or partner interest basis.
The takeaway
Inside basis belongs to partnership assets; outside basis belongs to the partner's partnership interest.
Related Summit resources
FAQ
What is the core idea?
Inside basis belongs to partnership assets; outside basis belongs to the partner's partnership interest.
What should you identify first?
Inside and outside basis measure different things and can diverge.
Why does this matter on the CPA Exam?
Separate the partnership's basis in its assets from each partner's basis in the partnership interest.