Question

Rick is a partner in the Ten Hicks Partnership. This year, he received a distribution consisting of two properties. Property 1 was worth $40,000 at the date of the distribution and had a tax basis to the partnership of $28,000. Property 2 was worth $60,000 and had a tax basis of $12,000. Rick’s tax basis in his partnership interest was $30,000 prior to the distribution. The partnership did not have any hot assets either before or after the distribution.

a. Will Rick recognize any gain or loss on receipt of the distribution?

b. What will be Rick’s tax basis in each of the properties received?

c.What will be his remaining tax basis in his partnership interest?

Answer 1

Answer a:

Rick’s tax basis in his partnership interest was $30,000 prior to the distribution. He received a distribution consisting of two properties. He has not received cash in distribution and therefore he does not recognize any gain.

Answer b:

His basis in properties received is lesser of carryover basis of properties in partnership or his basis in partnership.

Carryover basis of two properties ($28,000.+ $12,000=) $40,000

Rick's basis in partnership = $30,000

Since carryover basis of two properties is greater by $10,000, he must reduce aggregate basis of properties by $10,000. Neither property has declined in value; hence reduction in basis has to be allocated between two properties in proportion of their carryover basis.

Proportion of carryover basis of property 1 in total = $28,000 / $40,000 = 70%

Proportion of carryover basis of property 2 in total = $12,000 / $40,000 = 30%

As such 70% of reduction has to be applied to property 1 and 30% of reduction has to be applied to property 2.

Rick’s tax basis in each of the property 1 = $28,000 - $10,000 *70% =$21,000

Rick’s tax basis in each of the property 2 = $12,000 - $10,000 *30% =$9,000

Answer c:

His remaining tax basis in his partnership interest is $0.