This has got to be so simple, I hate to ask. Yet here I go:

Pretend for a moment that a partnership can have just one member. That is not the issue, but it makes it easier to explain. Also assume all of this takes place in one tax year. 

Sole partner buys membership interest for $400,000. Partnership uses that money to purchase real estate, which it then sells for $1,000,000. K-1 form shows gain of $600,000 which is distributed in full to the partner, and the partnership closed

Thinking about it from the partner's perspective, he or she invested $400,000 and received $600,000, a cash flow profit of $200,000. But the K-1 shows a gain of $600,000 which is the true profit that I believe should be taxed.

At liquidation, the partner's basis in the partnership interest is unchanged at $400,000 contributed plus $600,000 gain less $600,000 distribution = $400,000. If I deduct that basis against the $600,000 gain, then the net taxable is $200,000 which agrees to the cash flow profit above. But it's not the true taxable profit at the partnership level.

I realize the partner's basis is a capital asset, and may or may not be deductible within the same year as the K-1 is issued, but that's not the issue. 

I'm just missing one piece that is probably very simple.

Thanks in advance for any help! 

Jeff