The concepts of inside basis and outside basis can be confusing.
“Inside basis” is the partnership’s basis in its assets, whereas “outside basis” is a partner’s basis in their partnership interest.
When a partnership is first created, the partnership’s total inside basis is equal to the sum of the partners’ outside bases.
Three events can make the total inside basis different from the total outside basis:
(1) a partner dies
(2) a partner acquires a partnership interest through a sale or exchange
(3) the partnership distributes cash or property with a basis that exceeds the partner’s outside basis
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