Khalid contributes land fair market value of $700,000; adjusted basis of $200,000) and Dan contributes $700,000 cash to form Teal Partnership. Both Khalid and Dan own a 50% interest. One year later, Teal sells the land for $800,000. How much gain is recognized by each partner?
A) $600,000 to Khalid, $0 to Dan.
B) $550,000 to Khalid, $50,000 to Dan.
C) $300,000 to Khalid, $300,000 to Dan.
D) $50,000 to Khalid, $50,000 to Dan.

Question

Quizplus · Accepted Answer

The gain recognized is the difference between the selling price ($800,000) and the land's adjusted basis ($200,000), which is $600,000. This gain is allocated based on their ownership interest. Since Khalid contributed the land, he must recognize the pre-contribution gain of $500,000 (the difference between the fair market value at the time of contribution, $700,000, and the adjusted basis, $200,000). The additional gain of $100,000 (from the increase in value after the contribution, from $700,000 to $800,000) is split equally between Khalid and Dan, as they are 50/50 partners. Thus, Khalid recognizes $550,000 ($500,000 + $50,000) and Dan recognizes $50,000.

Khalid Contributes Land Fair Market Value of $700,000; Adjusted Basis