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Good afternoon. This will be reported on Form 1065 ...which is an information return the partnership files and then each partner is issued a K-1 indicating each partner's allocable share of each Partnership item. The K-1 will specify for each item where to report this item on your Form 1040 or one of its accompanying schedules.
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Wow! Typically, what happens is they give the distributions and reduce the capital accounts; then they allocate loss after those adjustments so they don't allocate loss that would take you negative. But, this actually works in your favor because you get to take the ordinary loss and get capital gain treatment on your gain. Since they have done it this way..report the negative basis amount on Schedule D. But, if you do this, you will then need to request that the partnership make a Section 754 election so that your outside basis equals your inside basis.