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Yes, limited partnerships are fun!

The cash you receive from them is not your taxable income. It is technically a return of your capital. Your taxable income is whatever is reported to you on the K-1.

To properly calculate your basis in a partnership, you start with the original purchase price. Add in your share of income from the K-1. Subtract off any deductions the partnership passed through to you and your share of non-deductible expenses (also reported on the K-1). Subtract off the distributions made to you. The result is your basis.

If, by chance, a distribution reduces your basis to zero, the only that portion of the distribution that gets your basis down to zero is tax free. The remaining amount becomes a taxable capital gain.

Then, when you sell the partnership interest, the difference between the sale price and your basis is your gain or loss.

--Peter
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