Jenny has a $59,700 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $92,500 fair value and a $70,100 basis to JM. The land is encumbered with a $33,050 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?

Question

Quizplus · Accepted Answer

Jenny's basis in the land is equal to JM's basis in the land, which is $70,100. The distribution reduces her basis in the partnership. Her share of the mortgage ($33,050) is considered as money received, reducing her basis in JM to $26,650 ($59,700 - $33,050). Then, the basis of the land ($70,100) further reduces her partnership basis. However, her basis cannot go below zero, so her remaining basis in JM is $0, and the excess $43,450 ($70,100 - $26,650) reduces her basis in the land to $26,650. However, this calculation was based on an incorrect interpretation of how the basis is adjusted. The correct approach is to first adjust Jenny's basis in the partnership by her share of the liability assumed, then allocate the remaining basis to the distributed property. Given the error in the initial explanation, the correct answer reflects Jenny's basis in the land as JM's basis in it, and the remaining basis in JM after accounting for the distribution and the liability assumed.

Jenny Has a $59,700 Basis in Her 50 Percent Partnership