7.1.7. Basis in a DPP
A limited partner’s basis is the amount of liability the limited partner assumes. An investor’s basis is her investment in the partnership plus her share of recourse debt (discussed soon) minus any cash distributions. A limited partner can lose no more than her basis, and the basis sets the limit for how much loss from this source may be deducted on an investor’s yearly tax return.
A limited partner’s initial basis in a DPP is the amount paid. For example, if the limited partner invests $60,000 and the broker-dealer’s commission is $5,000, then the limited partner’s basis is $60,000. Only $55,000 goes into the partnership, but the limited partner’s basis is still $60,000.
A loan taken out by the partnership may be in the form of a recourse note. If the DPP defaults, the lender has “recourse” to go after the personal assets of the limited partners. The limited partners’ cost basis is increased by their proportional shares of the note. If the loan is in the form of a non-recourse note, the lender has no recourse to go after the personal assets of the limited partners in case of default. The non-recourse note does not add to the limited partners’ cost basis.
Example: Miranda invests $15,000 in a DPP. She signs a recourse note for which her share is $20,000. During the year, she rec