Greg, Alex, and Tom formed a general partnership in 2000 which they call Green M
ID: 2554819 • Letter: G
Question
Greg, Alex, and Tom formed a general partnership in 2000 which they call Green Mountain Partners. Green Mountain Partners presently owns a bed and breakfast inn located in Quechee, Vermont. The property consists of a twenty-bedroom inn and spa complex, surrounded by twenty five acres of wooded property with walking and riding trails. Greg and Alex each hold a 30 percent capital and profits interest in the partnership, while Tom holds a 40 percent capital and profits interest. Greg holds an adjacent 30-acre piece of undeveloped land which he purchased in 1985 for investment purposes for $350,000. The property presently has no mortgage or other encumbrances on it. Current fair market value of the property is approximately $2,100,000. Greg, Alex, and Tom would like to subdivide Greg’s adjacent property and build an active retirement community consisting of 80 single-family homes, a riding stable, indoor swimming pool and gym, plus a recreational center. They estimate that land development and building costs for each home will average about $275,000 each, and can be marketed for approximately $525,000 each. Green Mountain Partners do not anticipate any problems with bank financing on this project. They come to you as their CPA and financial advisor, and ask the following: If Greg sold the land to the partnership, Green Mountain Partners would hold the land at what basis? Determine the character and estimate the amount of income/gain to Greg and his partners under this scenario.
Explanation / Answer
Green Mounain Partners will hold the and at its fair market value on the date of transfer i.e. $2,100,000.
Total Net Income from new model = (525,000 - 275,000) x 80 units - 2,100,000 (Land cost) = 17,900,000
Share of Greg = $5,370,000 (30%), Alex = $5,370,000 (30%), Tom = 7,160,000 (40%)
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