On March 1, 2019, George and James form the GJ General Partnership in which they will share profits and losses equally. George contributes $600,000 in cash and James contributes land with an adjusted basis of $400,000 and a fair market value of $750,000. The land is subject to a qualified nonrecourse mortgage of $150,000.
Required:
a. How much gain or loss will George, James and the
partnership recognize upon the formation of the partnership?
b. Determine each partner’s basis in his partnership
interest.
c. What is George’s at-risk basis?
d. What is the partnership’s adjusted basis for the
land?
e. Determine the total outside basis for the
partnership.
f. If the partnership sells the land for $800,000 on
May 31, 2020, how much gain will each partner report on his own tax
return?
Answer to a.
There is no gain or loss will George, James and the partnership recognize upon the formation of the partnership.
Answer to b.
George basis = $600,000
James basis = FMV of Land - Mortgage = $600,000
Answer to c.
George’s at-risk basis = 50% of (FMV of Land - Mortgage) - Adjusted basis of Land
= 50% of (600,000 - 400,000)
=$100,000
Answer to d.
Partnership adjusted basis for Land is $400,000 (adjusted basis of Partner)
Answer to e.
Partneship total outside basis = Is the tax basis of each individual partner's interest in the partnership FMV
= 600,000 Cash + 600,000 Land (FMV - Mortgage)
= $1,200,000
.
Answer to f.
If Partneship sells the land in $800,000 then total gain is $400,000 (Sale value - adjusted basis)
Sale Value = $800,000
Less: Adjusted basis = $400,000
total gain = $400,000
Partner gain 50% of $400,000 = $200,000
Each Partner gain is $200,000
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