Rashad contributes a machine having a basis of $30,000 and an FMV of $25,000 to a partnership in exchange for a 20% interest in partnership capital, profits, and losses. Prior to the contribution, the partnership had recourse liabilities of $20,000. The partnership assumes a $20,000 recourse liability that is owed by Rashad on the machine. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Rashad's basis in his partnership interest is
A)$11,000.
B)$18,000.
C)$22,000.
D)$34,000.

Question

Quizplus · Accepted Answer

Rashad's basis in his partnership interest is calculated by starting with his basis in the contributed property ($30,000), then subtracting the liability relief he receives ($20,000), which equals $10,000. However, since partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses, Rashad is assumed to take back on $8,000 of the liability (20% of $20,000, reflecting his interest in the partnership). Therefore, his basis is $10,000 (initial basis minus liability relief) plus $8,000 (his share of the liability assumed by the partnership), totaling $18,000.

Rashad Contributes a Machine Having a Basis of $30,000 and an FMV