Question

George and James are forming the GJ Partnership. George contributes $600,000 cash and James contributes nondepreciable property with an adjusted basis of $500,000 and a fair market value of $950,000. The property is subject to a $200,000 liability, which is also transferred into the partnership and is shared equally by the partners for basis purposes. George and James share in all partnership profits equally except for any precontribution gain, which must be allocated according to the statutory rules for built-in gain allocations.

a. ​	What is James’s adjusted tax basis for his partnership interest immediately after the partnership is formed?
b.	What is the partnership’s adjusted basis for the property contributed by James?
c. ​	If the partnership sells the property contributed by James for $1,200,000, how is the tax gain allocated between the partners?

Answer 1

a.James’s adjusted basis in the partnership interest is $400,000.

Computation:

Basis of property contributed=$500,000

Plus: James’s share of partnership liability($200,000/2)=$100,000

Less: James’s liability transferred to partnership=(200,000)

James’s adjusted basis in the partnership interest=$400,000

b.Partnership’s basis (carryover basis) is $500,000.

c.James is allocated $575,000 of the gain and George is allocated gain of $125,000.

Computation:

Sales price=$1,200,000

Less: Adjusted basis=(500,000)

Total gain on sale=$700,000

		James	George
	Built-in (precontribution) gain(Fair market value- Adjusted basis)	$450,000	$     –0–
	Remaining gain[($700,000-$450,000)/2]	125,000	125,000
	Gain allocated to partner	$575,000	$125,000