How does Belinda's basis in her LLC interests change with the LLC's liabilities?

Belinda's basis in her LLC interests increases by her share of the LLC's liabilities due to how tax law treats the basis in partnership and LLC interests. In general, a member's basis in an LLC reflects their investment and share of the liabilities of the entity. When an LLC incurs debt, the members typically increase their basis in the LLC by their proportionate share of that debt, as it represents an economic obligation that members are ultimately responsible for.

This increase is significant for tax purposes because it allows members to deduct losses and access the basis against distributions from the LLC. Therefore, as the LLC takes on more liabilities, each member's ability to utilize their basis effectively increases, fostering both a clear understanding of individual investment and risk exposure within the entity.