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?

Question

Quizplus · Accepted Answer

When a partner purchases an interest in a partnership, the partner's basis in the partnership interest is equal to the amount of cash and the adjusted basis of any property contributed to the partnership. In this case, Patrick purchased a one-third interest in the partnership for $600,000, so his initial basis in the partnership is $600,000.

Since the partnership has a 754 election in effect, when a partner purchases an interest in the partnership, the partner's share of the basis in the partnership assets is adjusted upward by the excess of the inside basis over the outside basis of the assets. In other words, if the partnership assets have an inside basis of $1,800,000 and an outside basis of $1,500,000, there is a $300,000 difference that can be allocated to Patrick's share of the assets. Since Patrick purchased a one-third interest in the partnership, his share of the basis adjustment is $100,000 ($300,000 x 1/3).

Therefore, the correct answer is B, which is 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