Question

Tom and Hank have decided to create a partnership, and both individuals will be contributing assets to the partnership. Tom has contributed cash of $100,000, equipment with a fair market value of $50,000, and a property worth $200,000, but that is encumbered by a mortgage of $100,000. The partnership will assume the mortgage. Tom has heard the terms of inside basis and outside basis. Please analyze and discuss what the inside and outside basis would be for Tom.

Answer 1

There are 2types of tax bases in a partnership - Inside basis and Outside basis. If a partner contributes an asset to the partnership, its inside basis would be the partnership's tax basis in the individual asset, whereas the outside basis would be the tax basis of each individual partner's interest in the partnership. In other words, when a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its fair market value (FMV) i.e. the inside basis. However, the outside basis of the partner would only be the amount of the basis that the partner had in the property.

1. Cash $100,000: Both the inside and outside basis would be the same in case of cash contribution i.e. $100,000.

2. Equipment (FMV $50,000): Inside basis would be $50,000 being the fair value of the equipment. However, the outside basis for Tom would be the tax basis of that equipment (not provided in the question)

3. Property worth $200,000, encumbered by mortgage of $100,000: If distributed property also has a secured liability, and if the partnership assumes the liability, it would decrease the partners' share of the liabilities.