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Sally is a 25% partner in the STUV partnership. She has a tax basis in her...

Sally is a 25% partner in the STUV partnership. She has a tax basis in her partnership interest of $300,000. Sally also owns some land and a small building that she would like to sell to the partnership. The property has a fair market value of $500,000. Sally purchased the building for $400,000, and after taking MACRS deductions, her tax basis in the building is $350,000.

1. Sally’s lawyer, who has a basic understanding of tax law, suggests that Sally contribute the building to the partnership, and subsequently take a distribution of $500,000 from the partnership. Assuming the form of this transaction is respected by the IRS, how much taxable income will Sally recognize?

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Answer #1

When a partner contributes property to its partnership firm, their basis is increased by the partner's tax basis in the contributed asset (FMV is ignored).

When a partner receives distributions in cash or in form of property, partner's basis is reduced by the same.

Innitial basis of Sally = $300,000

Add: Adjusted basis of the property contributed = $350,000

Less: Distribution in cash = $500,000

Net Basis of sally in partnership firm = $150,000

Since the amount distributed does not exceed Sally's basis in the firm, Sally will not be required to recognize any taxable income.

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