A contributes $100,000 cash to the AB partnership and B contributes a building w
ID: 2574881 • Letter: A
Question
A contributes $100,000 cash to the AB partnership and B contributes a building with an adjusted basis of $50,000 and a fair market value of $100,000. Unless otherwise stated, apply the traditional method with respect to all contributed property.
NEED HELP ON E, F & G.
(a) If the building is depreciable, has a 10-year remaining recovery period and is depreciated under the straight-line method, how much tax and book depreciation will be allocated to each partner?
(c) Same as (a), above, except that B’s basis in building is $40,000?
(e) If in (a), above, the building is sold for $90,000 after it has been held (and depreciated) by the partnership for two years, how must the partnership allocate the tax gain on the sale?
(f) Same as (e), above except the building is sold for $60,000?
(g) What result in (c), above, if the recovery period for the building is 20 years and the partnership elects the remedial method of allocation?
Explanation / Answer
Answer -
A. Traditional Method
Partner A is Non-contributing partner whereas partner B is Contributing partner.
Tax Depreciation on Building for one year for the Partnership = $ 50,000/10 = $ 5,000
Book Depreciation on building for one year for the Partnership = $ 1,00,000/10 = $ 10,000
Allocation of Book Depreciation to Partner A = $ 5,000
Allocation of book Depreciation to Partner B = $ 5,000
Allocation of Tax Depreciation to Partner A = $ 5,000
Allocation of Tax Depreciation to Partner B = $ 0
As per the traditional method, Book Depreciation is allocated to partners both Contributing and Non- Contributing partners.
Tax depreciation is allocated to Non contributing partners upto the book depreciation amount, if any tax depreciation remains after that, it is allocated to contributing partner.
______________________________________________________________________________________
E. Bulding sold for 90,000 after depreciation for 2 years
book value of building after 2 years = Book value - book depreciation = 1,00,000 - (2*10,000) = $ 80,000
tax basis of building after 2 years = Tax basis - tax deprciation = 50,000 - (2*5,000) = $ 40,000
Book gain = 90,000 - 80,000 = 10,000
Tax gain = 90,000 - 40,000 = 50,000
A
B
Tax Basis
Capital Account
Tax Basis
Capital Account
80,000
80,000
40,000
80,000
Book Gain ( $ 10,000)
0
5,000
0
5,000
Tax gain ( $ 50,000)
0
0
50,000
0
Totals
80,000
85,000
80,000
85,000
_______________________________________________________________________________________
F. Bulding sold for 60,000 after depreciation for 2 years
book value of building after 2 years = Book value - book depreciation = 1,00,000 - (2*10,000) = $ 80,000
tax basis of building after 2 years = Tax basis - tax deprciation = 50,000 - (2*5,000) = $ 40,000
Book loss = 80,000 - 60,000 = 20,000
Tax gain = 60,000 - 40,000 = 20,000
Therefore at a gain/ loss of $ 10,000 will be created for remedial allocation
A
B
Tax Basis
Capital Account
Tax Basis
Capital Account
80,000
80,000
40,000
80,000
Book loss ( $ 20,000)
0
-10,000
0
-10,000
Tax gain ( $ 20,000)
0
0
20,000
0
created gain/loss
-10000
10,000
Totals
70,000
70,000
70,000
70,000
__________________________________________________________________________________________
G. under Remedial method
Partner B contributes building with FMV as $ 1,00,000 and Tax basis as $ 40,000
the built in gain of building = $ 1,00,000 - $ 40,000 = $ 60,000
Book depreciation = Tax basis / 20 = 40,000/20 = $ 2,000
Tax Depreciation = built in gain/ 20 = 60,000/20 = $ 3,000
Allocation of Book depreciation to PArtner A = $ 2,500 ($ 2,000 * 0.5 + $ 3,000 * 0.5)
Allocation of Book Depreciation to PArtner B = $ 2,500 ($ 2,000 * 0.5 + $ 3,000 * 0.5)
Allocation of Tax Depreciation to PArtner A = $ 2,000
Allocation of Tax Depreciation to PArtner B = $ 0
Remedial Allocation to PArtner A = $ 500
Remedial Allocation to PArtner B = - $ 500
___________________________________________________________________________________________
A
B
Tax Basis
Capital Account
Tax Basis
Capital Account
80,000
80,000
40,000
80,000
Book Gain ( $ 10,000)
0
5,000
0
5,000
Tax gain ( $ 50,000)
0
0
50,000
0
Totals
80,000
85,000
80,000
85,000
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