In 2019 Ryce contributes nondepreciable property with an adjusted basis of $60,000 and a fair market value of $95,000 to the Montgomery Partnership in exchange for a one-half interest in profits and capital. In the next tax year, when the property's fair market value is $100,000, the partnership distributes the property to Jarvis, the other one-half partner.

Which partner must recognize a gain and what is the amount recognized? What is the effect on that partner's basis in the partnership interest?

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2 January, 05:38

In 2019 Ryce contributes nondepreciable property with an adjusted basis of $60,000 and a fair market value of $95,000 to the Montgomery Partnership in exchange for a one-half interest in profits and capital. In the next tax year, when the property's fair market value is $100,000, the partnership distributes the property to Jarvis, the other one-half partner.

Which partner must recognize a gain and what is the amount recognized? What is the effect on that partner's basis in the partnership interest?

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Malcolm Boyle · Answer 1

Ryce gains $37,500

Partner's basis in the partnership interest increases

Explanation:

1) Which partner must recognize a gain and what is the amount recognized?

It is acknowledged that, the contributing partner (Ryce) could recognize gain when one in two or both below situations occur:

+) contributed property is distributed to another partner (Jarvis) within seven years of contribution date (here the period is just 1 year)

=> The contributor would receive the remained net pre-contribution as the gain.

+) the partnership distributes the property other than cash to another partner (Jarvis) within seven years of contribution date

=> The contributor would receive one in two the following amount as gains:

the lesser of the remained net pre-contribution the excess of the fair market value over the interest before distribution

We have:

The remained net pre-contribution = 95,000 - 60,000 = $35,000 The excess of the fair market value over the interest before distribution = (100,000 - 95,000) * 50% = $2,500

=> The gain = The remained net pre-contribution + The excess of the fair market value over the interest before distribution

= $35,000 + $2,500 = $37,500

2) What is the effect on that partner's basis in the partnership interest?

In the situation that the partnership (Montgomery Partnership) distributes the property other than cash to another partner (Jarvis) within seven years from the date the partner (here is Ryce) contribute property to the partnership (here the period is just 1 year), Ryce could recognize gains.

In this case, Ryce - the contributing partner would have its basis in the partnership interest increase by the amount equal to its recognized gain to maintain the parity between its inside and outside basis.

So that, the effect on that partner's basis in the partnership interest is increase.