[jujubetree]

Got one questions re the formation of partnership

say if partner A set up a partnership by contributing cash 40K , property with adjusted basis 100K along with 220K mortgage, in exchange of 50% interest in partnership , what is A’s basis in the partnership?

I am thinking it as 40K+0K=40K and partner should recognise a taxable gain= 100K-220K*50%=10K

My question is when comparing 100K-220K*50% <0 shouldn’t we take cash 40K into consideration as well? then the answer will be different…

Also, what is the partnership’s basis in the property after contribution? is it the same as in A’s hand 100K?

Thanks!

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[PurpleK]

Reading the Code can be helpful for this question.

The general rule is that if a partnership assumes a liability of the contributing partner, the portion of the liability allocated to other partners under Section 752 is treated as a cash distribution from the partnership to the contributor.

In the case of your question, because the cash distribution would decrease the contributor's basis in his partnership interest below zero, Section 733 would kick in to prevent that from happening and the negative basis would be converted into a recognized gain. Therefore any distribution in excess of the contributing partner's basis generates taxable capital gain to the contributor under Section 731(a)(1) and Section 741.

In other words, based on the Code, despite contributing 40k of cash to the partnership, the contributing partner is still required to recognize the 10k of taxable gain. These two transactions cannot be netted together.

Lastly, the general rule for the partnership's basis in the contributed property is that gain recognized by a partner in connection with the contributed property subject to liabilities does not affect the partnership's basis in its assets (including the contributed property) unless the partnership has a Section 754 election in place (the primary exception to this rule applies only to investment companies as referenced to in Section 721(b)). So the basis should be the adjusted basis of 100k.

[jujubetree]

thank you very much – very clear to me now:)

live fast die young
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[Author]

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