IRC 752: The Framework for Partnership Liability Allocation

IRC 752 governs how partnership liabilities are allocated among partners for purposes of computing each partner's outside basis in the partnership interest. Outside basis is the tax basis each partner holds in the partnership interest itself, and it determines how much partnership loss a partner may currently deduct under IRC 704(d), whether a distribution triggers gain recognition under IRC 731(a)(1), and whether a contribution or other transaction is treated as a sale under the disguised sale rules of IRC 707(a)(2)(B).

The central principle of IRC 752 is that a partner's share of partnership liabilities is treated as a cash contribution to the partnership (increasing outside basis under IRC 752(a)) and any decrease in that share is treated as a cash distribution from the partnership (decreasing outside basis, and potentially triggering gain, under IRC 752(b)). Because liabilities affect the basis of the partners, the classification and allocation of each liability carries direct economic consequences for every partner in the partnership.

The regulations under IRC 752 draw a threshold distinction between two types of liabilities. A recourse liability is one for which any partner (or a person related to a partner) bears the economic risk of loss. A nonrecourse liability is one for which no partner bears the economic risk of loss. That distinction determines the allocation methodology: recourse liabilities are allocated to the partner who bears the risk; nonrecourse liabilities are allocated via a three-tier regulatory waterfall under Treas. Reg. 1.752-3 (verify current regulatory status at IRS.gov).

The practical stakes are high. A partner who relies on a share of partnership liabilities to support outside basis, and whose guarantee is later reclassified as a bottom-dollar guarantee under the TD 9788 regulations, may find that basis evaporated without a contemporaneous taxable event to signal it, leaving open positions on prior-year loss deductions and creating unexpected gain recognition on future distributions. For real estate partnerships relying on nonrecourse financing to fund depreciable property, the structure of the liability allocation determines the allowable loss for every partner in every year.

IRC 752(a) and 752(b): Basis Increases and Deemed Distributions

IRC 752(a): Deemed Cash Contribution

Under IRC 752(a), an increase in a partner's share of partnership liabilities (or an assumption of partnership liabilities by a partner) is treated as a contribution of money by that partner to the partnership. The effect is a dollar-for-dollar increase in the partner's outside basis in the partnership interest. This allows partners to include their allocable share of partnership borrowings in outside basis, which in turn permits them to deduct their share of partnership losses funded by borrowed money up to the amount of their outside basis.

The basis-increasing effect of IRC 752(a) is fundamental to the economics of leveraged partnerships. A real estate partnership that borrows $10 million on a nonrecourse mortgage to acquire an apartment complex allocates a share of that $10 million liability to each partner under IRC 752. Each partner's outside basis is increased by that allocated share, enabling each partner to absorb a proportionate share of the annual depreciation deductions that the property generates. Without the IRC 752(a) basis increase, partners with minimal cash contributions would have insufficient outside basis to deduct any depreciation allocated to them.

IRC 752(b): Deemed Cash Distribution

Under IRC 752(b), a decrease in a partner's share of partnership liabilities (or an assumption of a partner's liabilities by the partnership) is treated as a distribution of money from the partnership to that partner. The deemed distribution first reduces outside basis under IRC 733. If the deemed distribution exceeds the partner's outside basis before the deemed distribution, the excess is recognized as gain under IRC 731(a)(1). That gain is generally capital gain, because the partnership interest is a capital asset in the hands of most partners.

Liability decreases arise in several contexts. When a partnership repays debt, each partner's share of the repaid debt decreases. When a partnership refinances and the new debt is allocated differently among the partners (for example, when a recourse loan is replaced by a nonrecourse loan), a partner who bore the economic risk of loss on the old loan but receives only a proportionate share of the new nonrecourse loan will experience a decrease in allocated liability. When the TD 9788 bottom-dollar guarantee regulations reclassify a guarantee, the guaranteeing partner may experience an immediate deemed distribution without any cash changing hands.

Planning Note: Intra-Year Liability Shifts Can Trigger Mid-Year Gain

A deemed distribution under IRC 752(b) is treated as occurring on the date the partner's share of liability decreases. If a partnership repays a recourse loan in March and a partner's allocated liability drops below that partner's outside basis as of that date, the partner recognizes gain in March even though no actual cash was distributed. Practitioners must track liability allocations throughout the year and not simply compare beginning-of-year and end-of-year K-1 figures. Mid-year refinancings, paydowns, and guarantee restructurings all require immediate IRC 752 analysis. Verify current treatment under the applicable Treasury Regulations and IRS.gov before advising clients.

Recourse Liabilities: Economic Risk of Loss and Constructive Liquidation

Definition of Recourse Liability

Under Treas. Reg. 1.752-1(a)(1) (verify current regulatory status at IRS.gov), a partnership liability is a recourse liability to the extent any partner (or related person, within the meaning of IRC 267(b) or 707(b)(1)) bears the economic risk of loss for that liability. A liability is recourse with respect to a particular partner if that partner would be required to make a payment, net of any right to reimbursement, in the event the partnership's assets were insufficient to pay the liability. The allocation of a recourse liability to the partner bearing the risk is the statutory mechanism that makes the partner's guarantee economically meaningful for basis purposes.

The Constructive Liquidation Analysis

The economic risk of loss is determined under a constructive liquidation analysis prescribed by Treas. Reg. 1.752-2 (verify current regulatory status at IRS.gov). The analysis is a hypothetical: it asks what would happen to each partner's capital account if the partnership were wound up under the worst-case scenario. The constructive liquidation assumes all of the following occur simultaneously:

  1. All of the partnership's assets (including cash) become worthless and are disposed of in a fully taxable transaction for no consideration (zero proceeds).
  2. All items of partnership income, gain, loss, and deduction from the deemed disposition are allocated among the partners under the partnership agreement in effect at the time of the constructive liquidation.
  3. The partnership liquidates, and all partners contribute the amount of any deficit in their capital accounts (to the extent each partner is obligated to restore a deficit).
  4. Partnership liabilities are then satisfied from those contributions.

The partner who is obligated to contribute enough to cover a particular liability under this scenario bears the economic risk of loss for that liability in the amount of the required contribution. A general partner with unlimited personal liability typically bears the economic risk of loss for all recourse obligations of the partnership. A limited partner generally does not bear economic risk of loss unless the limited partner has signed a personal guarantee or other enforceable payment obligation.

Constructive Liquidation Example

Illustrative Example: Recourse Liability Allocation

AB Partnership has two partners: A, a general partner with a 50% interest, and B, a limited partner with a 50% interest. The partnership has a $1,000,000 recourse bank loan and no other liabilities. Partnership assets have a fair market value of $1,200,000 and an adjusted basis of $1,200,000 (no built-in gain or loss).

Under the constructive liquidation: all assets are deemed disposed of for $0, generating a $1,200,000 loss. Under the partnership agreement, losses are allocated 50/50. A's capital account is reduced by $600,000 and B's by $600,000. Assume both partners had beginning capital of $600,000. Both capital accounts are now $0. The partnership still owes $1,000,000 on the bank loan. Under the partnership agreement, A (as general partner) is obligated to restore a deficit and must contribute $1,000,000 to satisfy the loan. B, as a limited partner with no DRO (deficit restoration obligation), is not required to contribute anything.

Result: A bears the economic risk of loss for the full $1,000,000 recourse loan. The entire liability is allocated to A under IRC 752. A's outside basis is increased by $1,000,000; B's outside basis is unaffected by this loan. (This example is simplified for illustration. Verify your specific facts under current regulations at IRS.gov.)

Related Persons and the Anti-Abuse Rules

When a partner causes a related person (as defined under IRC 267(b) or 707(b)(1)) to bear the economic risk of loss, that related person's obligation is attributed back to the partner for purposes of classifying the liability as recourse. This prevents partners from engineering nonrecourse treatment by having a related affiliate issue the guarantee rather than the partner directly. The regulations under Treas. Reg. 1.752-2 also include anti-abuse provisions (verify current regulatory status at IRS.gov) that disregard certain payment obligations when the facts indicate the obligation will not be enforced, the obligor lacks the economic substance to perform, or the arrangement is designed primarily to shift basis rather than to reflect genuine economic risk.

Nonrecourse Liabilities: The Three-Tier Waterfall

Definition of Nonrecourse Liability

A partnership liability is nonrecourse under Treas. Reg. 1.752-1(a)(2) (verify current regulatory status at IRS.gov) to the extent no partner bears the economic risk of loss for that liability. Most commercial mortgage loans to real estate partnerships are nonrecourse: the lender's recourse is limited to the mortgaged property, and no partner is personally obligated to repay if the property value is insufficient. Because no partner bears the economic risk of loss, the allocation of nonrecourse liabilities among partners cannot follow the risk-based logic that governs recourse liabilities. Instead, the regulations under Treas. Reg. 1.752-3 prescribe a three-tier waterfall.

Tier 1: Partnership Minimum Gain

The first tier allocates nonrecourse liabilities to each partner in proportion to that partner's share of partnership minimum gain. Partnership minimum gain under Treas. Reg. 1.704-2 (verify current regulatory status at IRS.gov) is the amount by which a nonrecourse liability exceeds the adjusted tax basis of the property securing it. This excess represents the gain the partnership would recognize if it disposed of the property for an amount equal to the outstanding nonrecourse liability (i.e., in a foreclosure). Each partner's share of partnership minimum gain equals the partner's allocable share of the deductions that gave rise to the minimum gain, which are generally the depreciation deductions generated by the encumbered property. The rationale is that the partner who benefited from the depreciation deductions that drove the basis below the debt is the partner who should absorb the corresponding liability in Tier 1.

Tier 2: IRC 704(c) Minimum Gain (Partner Nonrecourse Debt)

The second tier allocates nonrecourse liabilities to each partner in proportion to that partner's share of minimum gain attributable to partner nonrecourse debt. Partner nonrecourse debt (also called partner nonrecourse liabilities or section 704(c) partner nonrecourse liabilities) arises when one partner (or a related person) bears the economic risk of loss for what would otherwise be a nonrecourse liability. Under Treas. Reg. 1.704-2(i) (verify current regulatory status at IRS.gov), deductions attributable to partner nonrecourse debt are allocated entirely to the partner who bears the economic risk of loss for that debt, and the minimum gain attributable to that debt is allocated in the same manner. Reverse IRC 704(c) allocations (where appreciated property was contributed and book value differs from tax basis) follow a similar pattern, with minimum gain attributable to the difference allocated to the contributing partner.

Tier 3: Excess Nonrecourse Liabilities

The third tier allocates any remaining nonrecourse liabilities (those not absorbed by Tiers 1 or 2) using a method specified in the partnership agreement from among three permissible options under Treas. Reg. 1.752-3(a)(3) (verify current regulatory status at IRS.gov):

The Tier 3 election must be consistent with the partnership agreement and applied uniformly from year to year. A partnership that switches Tier 3 methods without a valid reason may draw scrutiny on whether the switch was made to shift basis among partners rather than to reflect a genuine change in economic arrangement. Verify the permissible methods and election procedures under the applicable Treasury Regulations at IRS.gov.

Practice Note: The Waterfall Must Be Applied Sequentially

The three tiers are applied in strict sequence. No amount of nonrecourse liability moves to Tier 2 until Tier 1 is fully allocated, and no amount moves to Tier 3 until Tier 2 is fully allocated. The tiers are not blended or pro-rated. Practitioners preparing or reviewing Form 1065 schedules must compute Tier 1 first by calculating current-year partnership minimum gain for each nonrecourse liability, then Tier 2 for each partner nonrecourse debt, and only then run the Tier 3 allocation on the residual. Skipping or blending tiers is a common error in returns prepared without a liability allocation model. Verify current computation methodology under Treas. Reg. 1.752-3 at IRS.gov.

Bottom-Dollar Guarantee Rule: TD 9788

The Pre-TD 9788 Problem

Before the final regulations under TD 9788, certain guarantee structures were engineered to give partners recourse-liability basis without genuine economic exposure. A common structure involved a limited partner guaranteeing a portion of a nonrecourse loan, but structuring the guarantee to be triggered only if the outstanding loan balance fell below a floor (for example, guaranteeing a $10 million loan only if the outstanding balance dropped below $2 million). Under older interpretations, such a guarantee could arguably be treated as a recourse liability to the guarantor for the guaranteed amount, providing basis without real at-risk exposure.

The TD 9788 Final Regulations

Final regulations under TD 9788 (effective October 5, 2016, verify transitional agreement status at IRS.gov or with qualified tax counsel) addressed this problem by defining and disregarding bottom-dollar payment obligations. A payment obligation is a bottom-dollar payment obligation if it is not a first-dollar guarantee. A first-dollar guarantee requires the guarantor to bear loss beginning from the first dollar of the obligation. A guarantee that is triggered only when the principal balance falls to (or below) a floor is a bottom-dollar guarantee and is disregarded for purposes of determining whether the guaranteeing partner bears the economic risk of loss.

Distinguishing First-Dollar Guarantees from Bottom-Dollar Guarantees

Illustrative Comparison: First-Dollar vs. Bottom-Dollar Guarantee

First-dollar (valid recourse guarantee): Partner C guarantees $2,000,000 of a $10,000,000 nonrecourse mortgage, with the guarantee covering the first $2,000,000 of any deficiency. If the property sells for $8,000,000 in foreclosure, the lender recovers $8,000,000 from the property and then calls C's guarantee for the remaining $2,000,000 shortfall. C bears the economic risk of loss from the first dollar of deficiency up to $2,000,000. This is a valid recourse liability allocated to C in the amount of $2,000,000.

Bottom-dollar (disregarded under TD 9788): Partner D guarantees only the portion of the $10,000,000 loan that exceeds $8,000,000 (i.e., D is liable only if the outstanding balance drops below $8,000,000). D's guarantee is never triggered until nearly 80% of the loan has already been repaid or the collateral is severely depleted. This is a bottom-dollar payment obligation. Under TD 9788 (verify current regulatory status), D's guarantee is disregarded, and the $10,000,000 loan remains entirely nonrecourse, allocated under the Treas. Reg. 1.752-3 waterfall. D receives no recourse-liability basis from this guarantee.

(These examples are simplified for illustration. Verify your specific facts under current regulations and consult qualified tax counsel.)

Documentation Requirements and Transitional Rules

Partnership agreements and guarantee instruments entered into or modified after October 5, 2016 must conform to the TD 9788 final regulations. For agreements predating October 5, 2016, the regulations provide transitional rules (verify current transitional status at IRS.gov or with qualified tax counsel, as reliance on transitional provisions requires careful factual analysis). Practitioners reviewing guarantee structures for a new engagement must determine both the effective date of each guarantee and whether any modification to the agreement after October 5, 2016 caused a re-testing of the guarantee under the new rules.

Qualified Nonrecourse Financing Under IRC 465

The At-Risk Rules and the Real Estate Exception

The IRC 465 at-risk rules limit each partner's deductible loss from an activity to the amounts the partner has "at risk" in that activity. Generally, nonrecourse borrowing does not constitute an at-risk amount, because the borrower has no personal exposure if the activity fails. This default rule would severely limit loss deductions for real estate partnerships financed with nonrecourse mortgage debt. IRC 465(b)(6) provides a statutory exception for real estate activities: qualified nonrecourse financing is treated as an at-risk amount for real estate activities even though it is nonrecourse.

Definition of Qualified Nonrecourse Financing

Qualified nonrecourse financing under IRC 465(b)(6) must satisfy all of the following conditions (verify current requirements at IRS.gov):

Seller financing and loans from related parties generally do not qualify as qualified nonrecourse financing. Practitioners should review the specific lender relationship and loan terms in each engagement. Do not apply specific dollar thresholds without verifying current guidance at IRS.gov.

IRC 752 Classification Unchanged

It is important to note that the qualified nonrecourse financing designation under IRC 465 does not change the IRC 752 classification of the debt. The debt remains nonrecourse under IRC 752, because no partner bears the economic risk of loss. The nonrecourse debt is still allocated under the Treas. Reg. 1.752-3 three-tier waterfall for outside basis purposes. The IRC 465 treatment is a separate computation layer that determines how much of the partner's outside basis is also "at risk" for loss deduction purposes. A partner who has outside basis supported by a nonrecourse liability but lacks qualified nonrecourse financing status may be limited by the at-risk rules even though outside basis is positive. Both computations are required.

Disguised Sale Interaction: IRC 707

Liability Assumptions as Deemed Distributions

When a partner contributes property to a partnership, and the partnership assumes a liability encumbering the contributed property, the liability assumption is treated as a distribution of money to the contributing partner under IRC 752(b) to the extent the contributor's allocated share of the liability decreases as a result of the contribution. This deemed distribution is a critical input to the disguised sale analysis under IRC 707(a)(2)(B) and Treas. Reg. 1.707-3 (verify current regulatory status at IRS.gov).

If the deemed distribution (the decrease in the contributing partner's allocated liability), combined with any other transfers from the partnership to the partner, satisfies the disguised sale test, the transaction is recharacterized as a taxable sale rather than a tax-free contribution under IRC 721. The contributing partner recognizes gain at the time of contribution, and the partnership takes a cost basis in the property rather than the contributed carryover basis under IRC 723.

The Presumption Period and the Certified Debt Exception

Under Treas. Reg. 1.707-3 (verify current regulatory status at IRS.gov and verify the current applicable presumption period at IRS.gov), transfers between a partner and partnership that occur within a specified period are presumed to constitute a sale unless the facts and circumstances clearly establish that the transfers do not constitute a sale. Transfers more than that period apart are presumed not to constitute a sale. In the context of liability-based deemed distributions, practitioners must evaluate whether the deemed distribution date and the contribution date fall within the presumption window and whether any exception applies.

The qualified liability exception (Treas. Reg. 1.707-5, verify current regulatory status at IRS.gov) provides that a liability assumed by a partnership in connection with a contribution is not treated as money distributed to the contributing partner to the extent the liability is a qualified liability. A qualified liability generally is a liability that was incurred more than two years before the contribution and has encumbered the contributed property throughout that period, or was incurred in the ordinary course of the contributing partner's trade or business and is associated with assets contributed to the partnership. The certified debt exception addresses situations where the partner certifies that the liability is not a disguised sale liability. Practitioners must evaluate each exception against the specific facts of the transaction.

Practitioner Tip: Model IRC 752 Before Structuring the Contribution

Before a client contributes leveraged property to a partnership, run the IRC 752 liability allocation model in full. Determine how much of the encumbering liability will be allocated back to the contributing partner after the contribution (which reduces the deemed distribution) and how much is allocated away (which creates the deemed distribution). Then run the disguised sale test using the net deemed distribution as an input. A contribution that appears clean on its face can become a partial sale if the liability allocation strips away the partner's basis support. Confirm all computations under the applicable Treasury Regulations at IRS.gov before advising clients.

Seven-Year Presumption Period: Verify Current Regulations

The regulations under Treas. Reg. 1.707-3 (verify current regulatory status and current applicable period at IRS.gov or with qualified tax counsel) establish a presumption period during which related transfers are presumed to constitute a sale. The specific length of that period is set by the regulations and is subject to change. Do not apply any specific number of years as an absolute rule without confirming the current period in the applicable Treasury Regulations.

Schedule K-1 Reporting and Outside Basis Computation

Box 20 Code Z: Partner's Share of Liabilities

Partnership liabilities allocated to each partner under IRC 752 are reported in the supplemental information section of Form 1065 Schedule K-1 at box 20, code Z. The partnership separately states three categories of liability for each partner:

The partnership reports the year-end balance of each category. It does not separately report intra-year changes. Partners and their advisers must reconstruct intra-year changes if any mid-year liability events (repayments, refinancings, guarantee restructurings) occurred during the year. Relying solely on year-end K-1 figures without reviewing for intra-year triggers is a common error.

The Outside Basis Computation Worksheet

Form 1065 Schedule K-1 includes a partner's basis computation worksheet (in the instructions to Schedule K-1) that partners may use to track outside basis. The worksheet incorporates the beginning-of-year outside basis, adds the current-year share of liabilities (IRC 752(a)), subtracts decreases in liabilities (IRC 752(b)), adds income and gain items, and subtracts loss and deduction items and distributions. The resulting figure is the partner's end-of-year outside basis.

Because the worksheet is a computational tool and not a filed form, the partnership does not report each partner's outside basis on the tax return. Each partner is responsible for maintaining an outside basis tracking schedule. Practitioners advising a new client who has held a partnership interest for multiple years and lacks a documented outside basis schedule should reconstruct basis from all prior-year K-1s, reviewing every year's IRC 752 liability figures, distributions, income, and loss allocations. Relying on a client's unverified assertion of outside basis is a significant audit risk. Verify current Schedule K-1 instructions and basis tracking requirements at IRS.gov.

Practice Note: IRC 752 Liability Recategorization Requires K-1 Correction

If a partnership corrects the characterization of a liability (for example, reclassifying a purported recourse guarantee as nonrecourse after a TD 9788 review), amended Schedules K-1 may be required for the affected years to reflect the corrected liability allocations. Outside basis figures derived from the original K-1s may also need to be restated. Any deductions taken in excess of allowable outside basis in the prior years must be evaluated for IRC 704(d) limitation and potential deficiency. Coordinate with the partnership's tax counsel before filing corrected returns. Verify current amended return procedures and applicable statutes of limitation at IRS.gov or with qualified tax counsel.

OBBBA 2026: New Nonrecourse Financing Scenarios for Real Estate Partnerships

The One Big Beautiful Budget Act (OBBBA) and related legislation (verify current legislative and regulatory status at IRS.gov or with qualified tax counsel, as implementation guidance continues to develop) includes provisions that permanently restore 100% first-year bonus depreciation under IRC 168(k) for qualified property placed in service after a specified date, and introduces related expensing provisions for qualified production property. These provisions interact with IRC 752 nonrecourse liability planning in a direct and material way for real estate partnerships.

The interaction arises as follows. When a real estate partnership acquires depreciable property using nonrecourse financing, the nonrecourse loan is allocated among partners under the Treas. Reg. 1.752-3 waterfall, increasing each partner's outside basis by that partner's allocated share. If the property qualifies for bonus depreciation (or IRC 168(n) expensing), the partnership may deduct the entire cost basis of the property in the first year. Each partner is allocated a proportionate share of that deduction. Whether a partner can currently use that deduction is limited by the partner's outside basis under IRC 704(d) and, for real estate activities, by the partner's at-risk amount under IRC 465.

The nonrecourse liability allocation under IRC 752 therefore determines how large a first-year deduction each partner can absorb without running into the IRC 704(d) basis ceiling. A partner whose allocated share of nonrecourse qualified nonrecourse financing provides sufficient outside basis and at-risk amount can deduct a substantial first-year depreciation or expensing item immediately. A partner with thin outside basis cannot.

Practitioners advising real estate partnerships on property acquisitions financed with nonrecourse debt in 2025 and beyond must model the IRC 752 liability allocation, the partner's resulting outside basis and at-risk amount, and the anticipated bonus depreciation or expensing amount before advising on the economic benefits of the investment structure. The IRC 752 liability allocation is not merely a reporting item; it determines the timing and magnitude of the most valuable tax benefit OBBBA offers to leveraged real estate investors.

Note that OBBBA does not directly amend IRC 752 or the regulations under Treas. Reg. 1.752-2 or 1.752-3. The liability classification and allocation rules remain unchanged. OBBBA's effect is indirect: by creating large first-year deductions, it intensifies the significance of outside basis capacity, which in turn depends on the IRC 752 liability allocation structure. All OBBBA provisions and their effective dates should be confirmed at IRS.gov or with qualified tax counsel before advising clients, as implementation guidance and final regulations continue to develop.

Comparison Table: Liability Types and Treatment Under IRC 752

Liability Type Economic Risk of Loss Basis Impact (IRC 752) At-Risk (IRC 465) Schedule K-1 Reporting Key Reg. Reference
Recourse -- general partner bears Yes; general partner bears unlimited personal liability under state law Increases GP's outside basis by full allocated amount under IRC 752(a) At risk; included in GP's at-risk amount under IRC 465(b)(1) Box 20 code Z, recourse column; allocated to GP Treas. Reg. 1.752-2 (verify at IRS.gov)
Recourse -- limited partner guarantee (true first-dollar) Yes; LP bears economic risk of loss for guaranteed amount from first dollar Increases guaranteeing LP's outside basis by guaranteed amount under IRC 752(a) At risk for guaranteed amount under IRC 465(b)(1); personal liability exists Box 20 code Z, recourse column; allocated to guaranteeing LP Treas. Reg. 1.752-2; TD 9788 (verify at IRS.gov)
Recourse -- bottom-dollar guarantee (disregarded) No; payment obligation is disregarded under TD 9788 because it is not a first-dollar guarantee No basis increase for the purported guarantor; liability remains nonrecourse, allocated under Treas. Reg. 1.752-3 Not at risk as a personal obligation; may qualify as qualified nonrecourse financing if real estate Box 20 code Z, nonrecourse or qualified nonrecourse column, not recourse TD 9788; Treas. Reg. 1.752-2(b)(3) (verify at IRS.gov)
Nonrecourse -- Tier 1 minimum gain No; no partner bears economic risk of loss Increases each partner's outside basis by that partner's Tier 1 allocated share under IRC 752(a) At risk if real property loan qualifies as qualified nonrecourse financing under IRC 465(b)(6) Box 20 code Z, nonrecourse or qualified nonrecourse column per IRC 465 status Treas. Reg. 1.752-3(a)(1); Treas. Reg. 1.704-2 (verify at IRS.gov)
Nonrecourse -- Tier 2 IRC 704(c) minimum gain No; partner nonrecourse debt is allocated to the partner bearing risk, but Tier 2 covers the minimum gain attributable to that debt Increases the relevant partner's outside basis by the Tier 2 amount allocated to that partner under IRC 752(a) At risk if real property loan qualifies under IRC 465(b)(6); otherwise not at risk Box 20 code Z; allocated to relevant partner per Treas. Reg. 1.704-2(i) Treas. Reg. 1.752-3(a)(2); Treas. Reg. 1.704-2(i) (verify at IRS.gov)
Nonrecourse -- Tier 3 excess nonrecourse No; residual allocation based on profits interests or IRC 704(b) allocation Increases each partner's outside basis by that partner's Tier 3 allocated share under IRC 752(a) At risk if real property loan qualifies under IRC 465(b)(6); otherwise not at risk Box 20 code Z, nonrecourse or qualified nonrecourse column per IRC 465 status Treas. Reg. 1.752-3(a)(3) (verify at IRS.gov)
Qualified nonrecourse financing (IRC 465 real estate) No; nonrecourse under IRC 752; no partner bears economic risk of loss Increases outside basis per IRC 752(a) via nonrecourse waterfall; IRC 465 treatment is separate layer At risk under IRC 465(b)(6) for real estate activities; permits loss deductions beyond cash investment Box 20 code Z, qualified nonrecourse financing column; separated from other nonrecourse IRC 465(b)(6); Treas. Reg. 1.752-3 (verify at IRS.gov)
Partner loan to partnership Yes; lending partner bears full economic risk of loss for the loan amount as creditor Increases lending partner's outside basis by the loan amount under IRC 752(a) as a recourse liability allocated to the lender At risk as a cash contribution equivalent; lending partner has personal basis in the obligation Box 20 code Z, recourse column; allocated to lending partner Treas. Reg. 1.752-2; IRC 752(a) (verify at IRS.gov)
Liability assumed from partner (partnership takes subject to) Depends on the post-assumption character; if no partner bears risk after assumption, becomes nonrecourse Decreases contributing partner's outside basis under IRC 752(b) (deemed distribution) to the extent not reallocated back to contributing partner Depends on post-assumption character; qualified nonrecourse financing status evaluated after assumption Box 20 code Z; character determined post-assumption; net liability shift reported at year end IRC 752(b); Treas. Reg. 1.707-5 for disguised sale interaction (verify at IRS.gov)
Anti-abuse rule liability (Treas. Reg. 1.752-2(j)) Disregarded; payment obligation set aside under anti-abuse provision because facts indicate it will not be honored or lacks economic substance No basis increase for the purported obligor; liability treated as nonrecourse and allocated under Treas. Reg. 1.752-3 Not at risk as a personal obligation; evaluated based on post-disregard nonrecourse character Box 20 code Z; reported as nonrecourse after disregard of anti-abuse obligation Treas. Reg. 1.752-2(j) (verify current regulatory status at IRS.gov)

Table reflects general rules under current law. Verify all regulatory citations and applicable provisions at IRS.gov or with qualified tax counsel before relying on any classification.