Under what conditions can a Partner deduct a loss from a Partnership Interest (or LLC Interest)?
In order for a Partner to be able to deduct a loss incurred from a partnership interest, that partner must satisfy the following 3 conditions as shown below;
1.Basis limitations rules
The taxpayer must have sufficient "tax basis" to deduct the loss.
The taxpayer must be deemed to be "at-risk" for the loss under IRS Code Sec. 465.
3.Passive activity Loss Limitations
The taxpayer must meet the passive loss limitations to deduct the loss under IRC Sec. 469.
Thus, according to the IRS, the partner can only deduct a loss incurred from a partnership interest only when all of the above conditions have been satisfied.