Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000.Just prior to the sale,Paul's outside and inside bases in KDP are $48,000.KDP's balance sheet includes the following: $\begin{array} { l r r }
\text { Assets: } & \text { Basis } & \text { FMV } \
\text { Cash } & \$ 48,000 & \$ 48,000 \
\text { Land held for irvestrnent } & 96,000 & 132,000
\end{array}$ $\begin{array}{l}
\text { Liabilities ard Capital: }\
\begin{array} { l l l }
\text { Capital } & \text { Paul } & 48,000 \
& \text { Kristi } & 48,000 \
& \text { David } & 48,000
\end{array}
\end{array}$ If KDP has a §754 election in place,what is Kathy's special basis adjustment?

Question

Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000.Just prior to the sale,Paul's outside and inside bases in KDP are $48,000.KDP's balance sheet includes the following: $\begin{array} { l r r } 
\text { Assets: } & \text { Basis } & \text { FMV } \
\text { Cash } & \$ 48,000 & \$ 48,000 \
\text { Land held for irvestrnent } & 96,000 & 132,000
\end{array}$ $\begin{array}{l}
\text { Liabilities ard Capital: }\
\begin{array} { l l l } 
\text { Capital } & \text { Paul } & 48,000 \
& \text { Kristi } & 48,000 \
& \text { David } & 48,000
\end{array}
\end{array}$ If KDP has a §754 election in place,what is Kathy's special basis adjustment?

Quizplus · Accepted Answer

Kathy's purchase price of $60,000 reflects a fair market value of $180,000 for the partnership as a whole (since she purchased a one-third interest). The total partnership outside basis in this case is $144,000 (the sum of the outside bases of the partners before the sale).

The land that KDP holds is worth $132,000 and has an inside basis of $96,000, which means that there is built-in gain of $36,000. Since Kathy purchased a one-third interest in the partnership for $60,000, she is entitled to allocate one-third of the built-in gain to herself, or $12,000. This is her special basis adjustment.

To see why, keep in mind that Kathy's tax basis in her partnership interest is $60,000. If KDP sold the land, it would realize a gain of $36,000. Since Kathy owns one-third of the partnership, she is allocated one-third of that gain, or $12,000. This increases her tax basis in the partnership to $72,000.

Kathy Purchases a One-Third Interest in the KDP Partnership from Paul