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The Tax Lawyer

Navigating the Split-Holding-Period Rules for Partnership Interests

Steven Z. Hodaszy


When a taxpayer contributes property to a partnership in exchange for an interest in the partnership, the partnership interest that she receives is a capital asset.  If the taxpayer subsequently disposes of her partnership interest in a taxable sale or exchange and recognizes any capital gain, whether that gain is short-term or long-term depends on how long the taxpayer held—or is deemed to have held—the partnership interest prior to selling or exchanging it.  The determination matters greatly, because long-term capital gains are taxed to individual taxpayers at preferential rates that are significantly lower than the ordinary marginal rates at which short-term capital gains (or ordinary gains) are taxed.

This article explains and critiques the rules for determining a partner’s holding period(s) for her partnership interest when the partner contributes multiple assets of different tax characters to the partnership in exchange for her interest.  As the article demonstrates, the holding-period rules for partnership interests in such a case are both complex and flawed.