Question

Partnership

Al, Bob and Chad agree to form a partnership; Al will invest a building with a fair value of $150,000 and a basis of 35,000 and a mortgage of 30,000. Bob will invest inventory and supplies with a fair value and basis of 75,000 and Chad will allow the partnership to use a copyright worth 25,000 that he created and will do the legal work to set up the partnership. For the legal work he would ordinarily charge 25,000. Each will own one-third of the entity and share one-third of profit and loss.

The partnership borrows an additional 50,000 from the bank.

Compute each partner's basis in the entity.

Answer 1

As per partnership law, whenever any partner brings in any property with mortgage, by that amount his basis reduces but for the same amount, basis of all the partners increases by their share in the partnership.

As per law, whenever any partner invests any asset to the partnership firm, its tax basis is considered as its basis even if its FMV is different. So, here the basis of building will be $ 35,000.

So, Al's adjusted basis = Tax basis of building - Mortgage + (1/3)Borrowing by partnership + (1/3)Mortgage on building

= 35,000 - 30000 + (1/3) 50,000 + (1/3) 30,000

= 35,000 - 30000 + 16,667 + 10,000

= 31,667

Bob's basis = Inventory basis + (1/3)Borrowing by partnership + (1/3)Mortgage on building

= 75,000 + 16,667 + 10,000

= 101,667

Chad's basis = Copyright basis + Services + (1/3)Borrowing by partnership + (1/3)Mortgage on building

= 25,000 + 25,000 + 16,667 + 10,000

= 76,667