Question

Tom and Jerry decide to start a Limited Partnership with Tom being the general partner and Jerry being the limited partner. Tom contributes cash of $20,000 to the partnership and Jerry contributes land with a basis of $20,000, fair market value of $40,000. The land is encumbered by a recourse mortgage of $20,000. Jerry’s basis in his partnership interest is:

a. $30,000 b. $10,000 c. $40,000 d. $0

Answer 1

Since the land is encumbered, the fair market value should not be considered.

Assume, each partner has 50% interest in the partnership.

J’s basis = Adjusted basis – (50% of mortgage)

               = 20,000 – (20,000 × 50%)

               = 20,000 – 10,000

               = $10,000

Answer: b