What effect do nonrecourse loans have on a limited partner's basis?

Nonrecourse loans have a specific impact on a limited partner's basis in a partnership. When a nonrecourse loan is taken on, it provides additional capital to the partnership without the requirement for the partner to repay that loan personally, thereby shifting the risk of repayment to the partnership itself.

In the context of a limited partner's basis, the amount of the nonrecourse debt must be added to their basis in the partnership. This is because the basis calculation includes debts for which the partner is allocated responsibility, even if those debts are nonrecourse and not personally guaranteed. The underlying principle is that a limited partner could benefit from the income generated by the assets acquired through this borrowed money, and therefore their investment basis reflects this additional financing.

Consequently, by increasing the basis by the amount of the debt liability, a limited partner gains the potential for larger distributions and taxation consequences tied to their increased basis in the partnership.