Reg. § 1.752-3 — Partner's share of nonrecourse liabilities.

(a) In general A partner's share of the nonrecourse liabilities of a partnership equals the sum of through of this section as follows—

(1) The partner's share of partnership minimum gain determined in accordance with the rules of section and the regulations thereunder;

(2) The amount of any taxable gain that would be allocated to the partner under section (or in the same manner as section in connection with a revaluation of partnership property) if the partnership disposed of (in a taxable transaction) all partnership property subject to one or more nonrecourse liabilities of the partnership in full satisfaction of the liabilities and for no other consideration; and

(3) The partner's share of the excess nonrecourse liabilities (those not allocated under and of this section) of the partnership as determined in accordance with the partner's share of partnership profits. The partner's interest in partnership profits is determined by taking into account all facts and circumstances relating to the economic arrangement of the partners. The partnership agreement may specify the partners' interests in partnership profits for purposes of allocating excess nonrecourse liabilities provided the interests so specified are reasonably consistent with allocations (that have substantial economic effect under the section regulations) of some other significant item of partnership income or gain (significant item method). Alternatively, excess nonrecourse liabilities may be allocated among the partners in accordance with the manner in which it is reasonably expected that the deductions attributable to those nonrecourse liabilities will be allocated (alternative method). Additionally, the partnership may first allocate an excess nonrecourse liability to a partner up to the amount of built-in gain that is allocable to the partner on section property (as defined under ) or property for which reverse section allocations are applicable (as described in ) where such property is subject to the nonrecourse liability to the extent that such built-in gain exceeds the gain described in of this section with respect to such property (additional method). The significant item method, alternative method, and additional method do not apply for purposes of . This additional method does not apply for purposes of . To the extent that a partnership uses this additional method and the entire amount of the excess nonrecourse liability is not allocated to the contributing partner, the partnership must allocate the remaining amount of the excess nonrecourse liability under one of the other methods in this . Excess nonrecourse liabilities are not required to be allocated under the same method each year.

(b) Allocation of a single nonrecourse liability among multiple properties

(1) In general For purposes of determining the amount of taxable gain under of this section, if a partnership holds multiple properties subject to a single nonrecourse liability, the partnership may allocate the liability among the multiple properties under any reasonable method. A method is not reasonable if it allocates to any item of property an amount of the liability that, when combined with any other liabilities allocated to the property, is in excess of the fair market value of the property at the time the liability is incurred. The portion of the nonrecourse liability allocated to each item of partnership property is then treated as a separate loan under of this section. In general, a partnership may not change the method of allocating a single nonrecourse liability under this while any portion of the liability is outstanding. However, if one or more of the multiple properties subject to the liability is no longer subject to the liability, the portion of the liability allocated to that property must be reallocated among the properties still subject to the liability so that the amount of the liability allocated to any property does not exceed the fair market value of such property at the time of reallocation.

(2) Reductions in principal For purposes of this , when the outstanding principal of a partnership liability is reduced, the reduction of outstanding principal is allocated among the multiple properties in the same proportion that the partnership liability originally was allocated to the properties under of this section.

(c) Examples The following examples illustrate the principles of this section:

Example 2. Excess nonrecourse liabilities allocated consistently with reasonably expected deductions. The facts are the same as in Example 1 except that the partnership agreement provides that depreciation deductions will be allocated to A. The partners agree to allocate excess nonrecourse liabilities in accordance with the manner in which it is reasonably expected that the deductions attributable to those nonrecourse liabilities will be allocated. Assuming that the allocation of all of the depreciation deductions to A is valid under section , immediately after purchasing the depreciable property, A's share of the nonrecourse liability is $1,000. Accordingly, A is treated as if A contributed $1,000 to the partnership.

Example 3. Allocation of liability among multiple properties.

(i) A and B are equal partners in a partnership (PRS). A contributes $70 of cash in exchange for a 50-percent interest in PRS. B contributes two items of property, X and Y, in exchange for a 50-percent interest in PRS. Property X has a fair market value (and book value) of $70 and an adjusted basis of $40, and is subject to a nonrecourse liability of $50. Property Y has a fair market value (and book value) of $120, an adjusted basis of $40, and is subject to a nonrecourse liability of $70. Immediately after the initial contributions, PRS refinances the two separate liabilities with a single $120 nonrecourse liability. All of the built-in gain attributable to Property X ($30) and Property Y ($80) is section gain allocable to B.

(ii) The amount of the nonrecourse liability ($120) is less than the total book value of all of the properties that are subject to such liability ($70 + $120 = $190), so there is no partnership minimum gain. . Accordingly, no portion of the liability is allocated pursuant to of this section.

(iii) Pursuant to of this section, PRS decides to allocate the nonrecourse liability evenly between the Properties X and Y. Accordingly, each of Properties X and Y are treated as being subject to a separate $60 nonrecourse liability for purposes of applying of this section. Under of this section, B will be allocated $20 of the liability for each of Properties X and Y (in each case, $60 liability minus $40 adjusted basis). As a result, a portion of the liability is allocated pursuant to of this section as follows:

Partner	Property	Tier 1	Tier 2
A	X	$0	$0
	Y	0	0
B	X	0	20
	Y	0	20

(iv) PRS has $80 of excess nonrecourse liability that it may allocate in any manner consistent with of this section. PRS determines to allocate the $80 of excess nonrecourse liabilities to the partners up to their share of the remaining section gain on the properties, with any remaining amount of liabilities being allocated equally to A and B consistent with their equal interests in partnership profits. B has $70 of remaining section gain ($10 on Property X and $60 on Property Y), and thus will be allocated $70 of the liability in accordance with this gain.

The remaining $10 is divided equally between A and B. Accordingly, the overall allocation of the $120 nonrecourse liability is as follows:

Partner	Tier 1	Tier 2	Tier 3	Total
A	$0	$0	$5	$5
B	0	40	75	115

(d) Effective/applicability dates The third, fourth, fifth, and sixth sentences of of this section apply to liabilities that are incurred, taken subject to, or assumed by a partnership on or after October 5, 2016, other than liabilities incurred, taken subject to, or assumed by a partnership pursuant to a written binding contract in effect prior to October 5, 2016. For liabilities that are incurred, taken subject to, or assumed by a partnership before October 5, 2016, the third, fourth, fifth, and sixth sentences of of this section as contained in 26 CFR part 1 revised as of April 1, 2016, apply.

Reg. § 1.752-3 Partner's share of nonrecourse liabilities.