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Tax Treatment of Liquidations of Partnership Interests

By Eric Smith
The CPA Journal
December 2020/January 2021 Edition

The liquidation of a partner’s entire partnership interest can take various forms, including payment made by the partnership to the retiring partner in complete redemption of the partner’s interest or a sale of such interest to the remaining partners. In both circumstances, the retiring partner receives cash or property in exchange for his partnership interest and the remaining partners proportionately increase their share in the assets of the partnership. Despite the economic consequences of the sale and redemption being identical, the structure can result in significantly different tax consequences to the retiring partner and the remaining partners.

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