Sophie received a 30 percent interest in a general partnership in exchange for property valued at $35,000 (adjusted basis = $25,000)and services valued at $5,000.In addition,the partnership assumed a $10,000 liability on the property.What is Sophie's basis in her partnership interest?
A)$20,000
B)$23,000
C)$25,000
D)$39,000
E)None of the above

Question

Quizplus · Accepted Answer

Sophie's basis in her partnership interest is calculated as follows:
Adjusted basis of property contributed = $25,000
Fair market value of property contributed = $35,000
Recognized gain on property contribution = $10,000
Value of services contributed = $5,000
Total amount realized = $40,000 (the sum of recognized gain and value of services contributed)
Sophie's 30% interest in the partnership is valued at 30% of the total partnership value, which includes the $10,000 liability assumed by the partnership. Therefore, Sophie's share of the partnership value is equal to:
($40,000 - $10,000) x 30% = $9,000
Sophie's basis in her partnership interest is equal to the sum of the recognized gain on the contribution and her share of the partnership value, or:
$25,000 + $10,000 + $9,000 = $44,000
However, since Sophie only invested $40,000 in the partnership (the total amount realized), her basis in her partnership interest is limited to that amount. Therefore, Sophie's basis in her partnership interest is $40,000 x 30% = $12,000. Since her adjusted basis of the property contributed was $25,000, she recognizes $15,000 of gain ($25,000-$10,000) on the contribution. Her adjusted basis in her partnership interest is her total basis, $12,000.

Sophie Received a 30 Percent Interest in a General Partnership