Consequences of liquidating
Initially, your basis is equal to the amount of cash plus your basis -- or cost -- in any property contributed to the business.Your basis increases and decreases over the years for required adjustments to arrive at adjusted basis -- the amount you'll use to calculate gain or loss after the liquidation.Mutual funds typically keep cash reserves to cover investor redemptions so that they will not be forced to liquidate portfolio securities at inopportune times.With most mutual fund redemptions, the proceeds are distributed to the investor on the following business day.All of these charges are described in a fund's prospectus.It is important that investors read a fund's prospectus to understand all of the financial implications before buying, selling or exchanging mutual fund shares.Under §723, the partnership’s initial basis in property contributed to it is equal to the adjusted basis of the property in the hands of the contributing partner, increased by the amount of gain, if any, recognized by the contributing partner under §721(b).
When investors redeem mutual fund shares, the process is very simple. Instead, the shares are priced at the close of the market at 4 p.m., when their net asset value (NAV) is calculated.If your basis is zero, this means the amount you eventually sell the property for is all taxable gain.Before you can figure out the tax effects of the liquidation, you'll need to know your adjusted tax basis in the partnership.A loss results when the liquidating distribution is less than the partner's basis in the partnership.
Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.Therefore, partners who have held an interest in the partnership for more than one year as of the date of a liquidating distribution will pay lower rates of tax on the gain than they do on a partnership's operating profit.