6. Joel and Desmond are forming the JD Partnership. Joel contributes $300,000 ca

Question

6. Joel and Desmond are forming the JD Partnership. Joel contributes $300,000 cash and Desmond contributes nondepreciable property with an adjusted basis of $80,000 and a fair market value of $330,000. The property is subject to a $30,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. Joel and Desmond share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations.

a. What is Desmond’s adjusted tax basis for his partnership interest immediately after the partnership is formed?

b. What is the partnership’s adjusted basis for the property contributed by Desmond?

c. If the partnership sells the property contributed by Desmond for $360,000, how is the tax gain allocated between the partners?

Explanation / Answer

If the contributed capital is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below to zero) by the liability assumed by other partners.

Adjusted basis of property - $50,000

Less: 50% share of liability - $10,000 (assumed by other partner)

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Partner basis                     - $40,000

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Therefore, the adjusted partner basis immediately after the partnership is formed is $40,000

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