The determination of gain or loss when you contribute property to a partnership is based on several factors:
- The partnership's basis in the contributed property generally includes the contributing partner's adjusted tax basis in the property, as well as any gains the partner recognizes as per certain rules.
- At the time of making a contribution, the contributing partner typically does not acknowledge any gain or loss. Exceptions exist, such as when the contribution is viewed as a disguised sale or when liabilities are relieved.
- If the property being contributed has a built-in gain or loss, the contributing partner is given credit for it when the partnership sells the property.
- The contributing partner's current property holding period is included in the holding period for the contributed property.
Here is an explanation for a comprehensive understanding?
A and B formed a partnership that stipulates that they will split any profits or losses equally.
- Partner A donated a land that has a adjusted basis of $70,000 and a fair market value of $100,000.
- Partner B contributed $100,000 to the partnership, which is valued at the same fair market value.
- Later on after the partnership was established. The partnership took out a loan of $150,000 against and made a payment of $100,000 to partner A.
- We'll determine based on the data above if partner A, who received $100,000 in cash, will be compensated for any gain.
Answer: Partner A will acknowledge a profit/gain of $65,000. The partner made a contribution of $35,000 to the land, which represents 50% of the $70,000. The partnership provided cash of $100,000, which resulted in a gain of $65,000 ($100,000 - $35,000). The treatment would differ if Partner A took a $100,000 loan from the partnership. Maybe the imputed interest may be involved.
