Partners in partnerships are subject to numerous limitations on claiming losses allocated to them by a partnership. Among the most important are the “passive activity losses” and the “at-risk limitation” rules.
The passive activity loss rules limit the ability of partners to use partnership losses to offset other income, unless the partner is actively involved in the partnership business. The at-risk limitation generally limits the amount of a loss a partner can claim to the amount invested by the partner.
Partners who do not expect to receive any return from their partnership interest may be able to claim an ordinary loss by abandoning their partnership interest. An ordinary loss is potentially available even when the abandoned partnership interest has some value. If the partnership interest has no value, it may also be possible to claim an ordinary loss on the basis of worthlessness.
Abandoning a partnership interest may be beneficial for taxpayers if the partnership expects to have debt forgiven. The cancellation of the partnership debt may result in cancellation of debt income being allocated to the partners.
