Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?
A) $37,500.
B) $40,000.
C) $42,500.
D) $45,000.

Question

Quizplus · Accepted Answer

A contributing partner's outside basis initially consists of the basis of contributed property less any debt relief plus any partnership debt allocated to the partner. When allocating nonrecourse debt secured by the contributed property, any nonrecourse debt that exceeds the basis of the contributed property must be allocated solely to the partner that contributed the property. Any remaining nonrecourse debt is allocating according to the partners' profit sharing ratios. [$5,000 (cash) + $30,000 (basis of building) − $35,000 (debt on building) + $25,000 (50% profit sharing ratio × $50,000 nonrecourse bank loan) + $5,000 (nonrecourse mortgage less basis of contributed property) + $15,000 (50% × $30,000 remaining mortgage on building) = $45,000].

Erica and Brett Decide to Form Their New Motorcycle Business