Have a Tax Question? Ask a Tax Expert
Although there are many facts that would need to be reviewed to ensure the correct application to your circumstances by an experienced practitioner, I will make some general comments so you can consider some of the issues.
You wrote "The FLP agreement does not permit withdrawals of any partners, but I can get that amended if need be (We, the family, are assuming the purpose of that was to prevent some kid bailing and wanting to cash out early)." There are, or were, likely other reasons in regard to gifting of interests for inclusion in the parents estate and the potential discount for lack of marketability for partnership interests for having that provision so before making that change it is recommended that you have this reviewed by the drafting attorney or another practitioner. The reasons may have changed now that the general partnership has been inherited; but there may still be valid reasons (such as marketability discount) for estate valuation that could deem this still necessary for the current, or future, partners.
As to what happens for the remaining partners there will be some flexibility depending on how those provisions are added if you do amend the agreement.
There may be gift tax consequences for you (or the other partners) if your interest is not exchanged for fair market value.
The most common result is for each of the other partners to own a prorated share of your interest after your disposal of the interest. So, if I was one of ten partners each with a ten percent share and one left then I will be one of nine partners with an eleven point one percent share after the change. There is no current gain or loss to the other partners by your withdrawal or disposition of your interest. Future income or loss would, usually, be distributed to those partners in the same ratios as it is currently done but would include a larger share than prior to the change.
In regards XXXXX XXXXX capital accounts being positive or negative that may or may not have any particular significance as to the tax consequences as it is your basis in the partnership (and not your capital account balance) that is used to determine any gain or loss upon liquidation of your interest.
Basis of a partnership can become somewhat involved but may not be far different than your capital account as the facts you described indicate few, if any, distributions or contributions during your ownership of the interest. Please know that I am leaving out as much of the tax jargon and complications as possible to present a basic overview for you.
If you do want to see a fairly comprehensive discussion including a worksheet for partner's basis see Partner's Basis Schedule and Basis Adjustments Checklist by aicpa.org
Past treatment by the partnership may have some bearing on your basis in the general partnership interest if there were other than cash contributions by the former general partner and how allocations were made in that event. See, for example, http://itech.fgcu.edu/faculty/sthompso/pship/outline/Lect4b.htm This is a good example of something that may be totally irrelevant or may be quite important based on the particular facts for the partnership.
Presuming for the sake of discussion that your basis is similar to your capital account balances, there may be a gain or loss on the liquidation of those interests as compared to the distributions that you get upon liquidation. The capital account generally does not include the current fair value but rather the partnership's cost of any partnership assets so that may be significant for real estate acquired some time in the past, as seems may be in your case.
Passive activity losses that arise from activities in which a partner did not materially participate (such as most rental activities) may be claimed as tax losses by the partner only to the extent that there is passive income or gain from similar activities or upon a final disposition of the passive activity. A gift of a partnership interest is not a qualifying disposition for these purposes and will not enable the donor to take a deduction for suspended passive activity losses. Instead, the suspended losses increase the donee's basis when the partnership interest is disposed. That will not usually be beneficial to either the donor or the donee if there are few, or no, partnership liabilities.
For a general basic course on passive losses of partners see http://www.irs.gov/pub/irs-tl/26_-_passive_activity_loss_disallowance_rules_for_partners.pdf
Presumably you have seen an accumulation of suspended passive activity losses on your individual returns as reflected on Form 8582 and are planning how to utilize those losses. Suspended passive activity losses can be claimed when there is a complete disposition of the activity in a taxable transaction. This may mean that a sale of your interest at fair market value is the better approach (depending on your facts).
The sale at fair value can also avoid any appearance that the liquidation of the one partner (you) was a special allocation that did not have substantial economic effect.
Okay, I know I just used a lot of tax jargon that is rife with complications. If you want to dig that deep see the section Economic Effect Defined at http://itech.fgcu.edu/faculty/sthompso/pship/outline/Lect4c.htm
If not, just know that there may be several good reasons to make this essentially an arm's length taxable sale of your interest.
To summarize, the main issue to be able to claim the suspended passive losses may be that the disposition has to be taxable transaction.
Depending on the situation, goals and future plans of the other partners the amendment to allow sale of your interest might or might not be significant.
Hopefully this answer provides a basis for further discussion on the avenues to pursue and some issues to perhaps avoid for disposing of your partnership interest.
Please ask if you wish to discuss these items more at this time.