Does this make sense?
When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a 1/3rd interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
Incorrect A.
Each partner reports a capital gain of $33,333.
B.
The entire gain of $100,000 must be specifically allocated to Acre.
C.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
D.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
You answered A. The correct answer is D.
The tax treatment is calculated as follows:
FMV of land on date of contribution $100,000
Less: Adjusted basis of land to Acre (60,000)
———
Precontribution gain to be allocated to
Acre upon subsequent sale of land $ 40,000
=========
Amount realized upon subsequent sale of
land contributed by Acre $160,000
Less: Adjusted basis of land to AQR partnership (60,000)
———
Realized gain $100,000
Less: Precontribution gain recognized by Acre (40,000)
———
Remaining gain to be recognized equally
by all 3 partners $ 60,000
=========
A built-in gain or loss on the date of contribution must be allocated to the contributing partner when the property is subsequently disposed of by the partnership in a taxable transaction. <\Blockquote>
FAR - 78*
AUD - 66, 79
REG - 73, 76
BEC - 79
.