Hi guys I have a question that really bothers me.
Shouldnt the basis be 10,000. 16,000-6000(25% of 24000)
Help would be greatly appreciated.
Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
a.$0
b.$16,000
c.$26,000
d.$32,000
Explanation
Choice “a” is correct. Strom's basis in the land ($16,000) carries over as an element of his basis in Ace. The assumption by Ace of Strom's liabilities on the land ($24,000) is treated as a distribution of money to Strom, which reduces his basis temporarily to negative $8,000. Then, through his status as a partner of Ace, Strom is treated as re-assuming 25% of the liability, or $6,000, and this increases his basis temporarily to negative $2,000. Since it is impossible to have negative basis, Strom realizes a gain (usually capital) of $2,000, the amount necessary to bring his basis up to zero.
Choice “b” is incorrect. Strom's basis in Ace is reduced because of the liability assumed by Ace.
Choice “c” is incorrect. Strom's basis in the land ($16,000) carries over as an element of Strom's basis in Ace.
Choice “d” is incorrect. Strom's basis in the land ($16,000) carries over as an element of Strom's basis in Ace. Then, Strom's basis in Ace is reduced because of the liability assumed by Ace.
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