A two-person partnership terminates when one partner sells his, her, or its partnership interest to the other partner.
This termination triggers a deemed liquidating distribution to the partners, and a tax on the realized gain fair market value less partnership basis) in the partnership's assets.

Question

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The sale of a partnership interest from one partner to another in a two-person partnership does not trigger a deemed liquidating distribution or a tax on the realized gain in the partnership's assets. Instead, the selling partner may recognize gain or loss on the sale of their partnership interest, which is generally treated as a capital gain or loss.

A Two-Person Partnership Terminates When One Partner Sells His, Her