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: $$\begin{array}{l}
\begin{array} { l r r }
\text { Assets: } & \underline { \text { Basis } } & \underline { \text { FMV } } \
\text { Cash } & \mathbf { \$ 4 8 , 0 0 0 } & \$ \mathbf { 4 8 , 0 0 0 } \
\text { Land held for investment } & \mathbf { 9 6 , 0 0 0 } & \mathbf { 1 3 2 , 0 0 0 }
\end{array}\\
\text { Liabilities and Capital: }\
\begin{array} { r r }
\text { Capital } \text { - Paul } &&&& \mathbf { 4 8 , 0 0 0 } \
\text { - Kristi } &&&& \mathbf { 4 8 , 0 0 0 } \
\text { - David } &&&& \mathbf { 4 8 , 0 0 0 }
\end{array}
\end{array}$$ 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: $$\begin{array}{l}
\begin{array} { l r r } 
\text { Assets: } & \underline { \text { Basis } } & \underline { \text { FMV } } \
\text { Cash } & \mathbf { \$ 4 8 , 0 0 0 } & \$ \mathbf { 4 8 , 0 0 0 } \
\text { Land held for investment } & \mathbf { 9 6 , 0 0 0 } & \mathbf { 1 3 2 , 0 0 0 }
\end{array}\\
\text { Liabilities and Capital: }\
\begin{array} { r r } 
\text { Capital } \text { - Paul } &&&& \mathbf { 4 8 , 0 0 0 } \
\text { - Kristi } &&&& \mathbf { 4 8 , 0 0 0 } \
\text { - David } &&&& \mathbf { 4 8 , 0 0 0 }
\end{array}
\end{array}$$ If KDP has a §754 election in place, what is Kathy's special basis adjustment?

Quizplus · Accepted Answer

Paul's outside basis of $48,000 is less than the land's fair market value of $132,000. This means that there is a Built-In Gain (BIG) of $132,000 - $48,000 = $84,000. When Kathy buys one-third interest for $60,000, she needs a special basis adjustment to account for her share of this BIG. The special basis adjustment is calculated as follows:

BIG * percentage interest purchased = special basis adjustment
$84,000 * 1/3 = $28,000

However, since Paul's outside basis is less than the land's fair market value, the special basis adjustment is limited to the difference between the fair market value and outside basis of the asset sold. In this case, the special basis adjustment is limited to $12,000 ($132,000 FMV - $48,000 outside basis). Therefore, Kathy's special basis adjustment is $12,000.

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