Patrick purchases a one-third interest in the PPP partnership for $600,000. The partnership has assets with a value of $1,500,000. PPP has a 754 election in effect. What is the amount of the basis adjustment?
A)$0
B)$300,000 increase in the basis of partnership assets
C)$100,000 increase in Patrick's basis in the partnership assets
D)$100,000 increase in Patrick's share of the basis in the partnership assets

Question

Quizplus · Accepted Answer

When a partner purchases an interest in a partnership, the basis of the partner's share of the partnership's assets is adjusted based on the purchase price. Since Patrick purchases a one-third interest in the partnership for $600,000, his share of the partnership assets is $1,800,000 ($600,000 / 0.33). However, the partnership's assets are only valued at $1,500,000, so there is a $300,000 built-in gain. Because the partnership has a 754 election in effect, Patrick's basis in his share of the partnership assets is increased by his share of the built-in gain, which is $100,000 (one-third of $300,000). Therefore, the correct answer is choice D - a $100,000 increase in Patrick's share of the basis in the partnership assets.

Patrick Purchases a One-Third Interest in the PPP Partnership for $600,000