Outside basis, inside basis and book capital are related, but each follows a different ledger.
Outside basis measures the partner’s tax investment in the partnership interest. Inside basis measures the partnership’s tax investment in each asset. A § 704(b) book capital account tracks a different economic and allocation framework. One balance cannot simply be substituted for another.
Start by labeling the ledger. A contribution can carry different book and tax amounts; debt allocations can affect outside basis without producing an equal change in book capital. The K-1 capital account alone is therefore not a complete outside-basis schedule.
Work through an example
Illustration: property with a $40,000 adjusted tax basis and $100,000 value is contributed without debt. In a simple nonrecognition case, the property’s initial inside tax basis and the partner’s initial outside basis are generally $40,000. A book capital amount may instead reflect $100,000. The $60,000 difference calls for a § 704(c) analysis.
Return to the sources
Contributions and nonrecognition
Begin the analysis of a property contribution, then test for exceptions and related transaction rules.
Initial outside basis on contribution
The partner’s starting basis generally follows contributed cash and adjusted tax basis, subject to other rules.
The partnership’s basis in contributed property
Inside basis belongs to the partnership’s assets; it is distinct from a partner’s outside basis.
Allocations and capital accounts
Read the detailed allocation rules and capital-account framework alongside § 704.
Contributed property and built-in gain
Explore the methods used to account for differences between book value and tax basis.
First edition: November 15, 2026. Educational scope and current links reviewed for this release. Source text and effective dates control.