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

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Rashad's basis in his partnership interest is calculated as follows:
Basis of contributed property: $30,000
FMV of contributed property: $25,000
Rashad's deemed sale price: $25,000
Adjusted basis of contributed property: $30,000 - $20,000 = $10,000
Rashad's recognized loss on deemed sale: $25,000 - $10,000 = $15,000
Rashad's share of partnership liabilities: $20,000
Rashad's adjusted basis in partnership interest: $15,000 - $20,000 = -$5,000
However, the adjusted basis cannot be negative, so Rashad's basis is limited to zero. Therefore, his basis in his partnership interest is $0 + 20% of the partnership liabilities assumed by the partnership, which is $4,000. Therefore, Rashad's basis in his partnership interest is $4,000.

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