Partnership Basis

Question 1

Formation of a Partnership

Answer 1

Generally, an exchange of partnership interest for cash or property is a tax-free transaction. A partner’s basis in partnership is increased for cash or adjusted basis of property contributed. Additionally, partners have unlimited liability in a partnership. Therefore, when liability is contributed, there is a twofold effect: (1) the partner’s basis is reduced for the liability assumed by the partnership and (2) all partner’s basis (including the contributing partner) is increased by the proportionate share of liability assumed by the partnership.

Question 2

Liquidation of Partnership

Answer 2

Generally, a gain or loss is realized in the event of liquidation of partnership interest which is equal to the difference between the amount realized and outside basis of the partner. The amount realized is equal to cash and/or property received plus debt relief. Also, if both cash and property are distributed, cash distributions are applied first to the partner basis, followed by property distributions. While excess cash distributions can result in a gain or loss to the partner, property distributions cannot.

If the cash distributions exceed the partner’s basis, the partner experiences a gain on the excess. If property is also distributed with the cash, the cash is applied first, and the remainder is the basis in the land. If sufficient cash is received to reduce the partner’s basis to 0, the partners basis in the property will be 0 and no gain will be recognized.

Question 3

Acquisition of Share of Partnership

Answer 3

Shareholder Basis =

Cash Contributed
Carryover Basis of property contributed - NOT FMV
% Mortgage relieved
% Debt assumed

Question 4

Section 754 transactions

Answer 4

Section 754 allows a partnership to adjust the basis of partnership property when property is distributed or when a partnership interest is transferred and thus reconcile a new partner’s outside and inside basis in the partnership.

Purchase Price $100,000
Less: Basis that the partnership has in the assets for the % of interest sold (25% x $100,000) ($25,000)
743(b) Adjustment $75,000

The adjustment gets added to the partnership’s basis in total assets and adjusts the Purchasing Partner’s basis in the partnership.

Easy way: Compute purchasing partners new basis in the partnership and the difference is the adjustment

Question 5

Shareholder Transfer of property to corporation

Answer 5

Shareholders that transfer property to a C Corp that own 80% or more is a non taxable event.

However, if there is boot involved. IE Cash the exchange is treated the same as a like-kind exchange.
** The gain recognized is the lesser of
Gain realized on exchange or
Actual boot received