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

To determine Kathy's special basis adjustment, we need to first calculate the inside basis of KDP. Since Paul holds a two-thirds interest in KDP and the total inside basis is $48,000, the inside basis is $72,000 (($48,000 / 2) x 3).

After Kathy purchases a one-third interest in KDP for $60,000, her outside basis in the partnership is $60,000. Since her proportionate share of the inside basis of KDP is now $72,000 / 3 = $24,000, there is a positive §754 adjustment of $36,000 ($24,000 - $0) that increases her inside basis to $60,000 + $36,000 = $96,000.

Therefore, Kathy's special basis adjustment is $36,000.

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