Peter contributes property to a partnership in exchange for a 30% interest in the partnership. The...

Peter contributes property to a partnership in exchange for a 30% interest in the partnership. The contributed property consists of real estate he owns worth $500,000. Peter has an adjusted basis in the real estate of $200,000 and the real estate is subject to a mortgage of $300,000. What is Peter’s basis in his partnership interest, and how much gain or loss does he recognize?

a. negative basis of $10,000, and no gain is recognized.b. 0 basis and gain of $10,000 is recognized.c. 200,000 basis and no gain is recognized.d. 0 basis and a loss of $10,000 is recognized.

My answer is (c) 200,000 basis and no gain is recognized.(500,000-300,000)=200,000-200,000 adjusted basis is0 gain. Is this correct?

Solutions

Expert Solution

Hey !!

Good to know that you have first tried the question yourself :)

However, the correct answer should be Option B i.e 0 basis and gain of $10,000 is recognized

Now let's come to the solution...

Generally, Neither a partner nor the partnership recognizes a gain or loss when a person contributes property to the partnership in exchange for a partnership interest.

If contributed property is subject to a mortgage or if the partnership assumes a partner's liabilities, the basis of that partner's interest is reduced by the liability assumed by the other partners.

If the liabilities assumed exceed the partner's basis in the property,the partner must recognize a gain for the excess liabilities assumed.

In the Present Case :

The property is subject to Mortgage and the partnership will have to assume Peter's liabilities

Amount of Mortgage Assumed by Others

= 300,000 * 70%

=210,000

Adjusted Basis = $ 200,000

Therefore the partner must recognise gain for excess liabilities assumed.

Difference between Mortagaged Assumed of 210,000 and his basis of $200,000 ie $10,000 would be treated as capital gain from the sale or exchange of a partnership interest.

However, this gain wouldn't increase the basis of his partnership interest.

Therefore, the Correct option should be B.

I hope the reasoning is clear to you....do let me know if you have any further queries....happy to help :)

All the best :)

ekkarill92 answered 1 year ago

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