X contributed rental real estate (land and building) that was held for investment to a partnership in exchange for a 50% interest. The real estate has a tax basis of $1.2 million and a fair market value of $2 million. X’s real estate is encumbered by a $1.5million non-recourse mortgage (secured by the land and building) and the partnership takes X’s contributed property subject to the mortgage. The other partner contributed cash of $500,000 in exchange for a 50% interest. The cash contribution by the other partner will be used to make renovations (i.e., capital improvements) to the real estate contributed by X. Assume that the partnership agreement complies with the requirements of the §704(b) regulations with respect to allocations, distributions, etc. Assume also that the partnership agreement provides that for purposes of §752, the partners’ share of “excess” non-recourse liabilities are based on the partners’ interest in the partnership.

1. What are the tax implications to X and the partnership upon the execution of this transaction assuming the $1.5 million of debt on the property was incurred three years prior to the contribution to the partnership? Compute the tax basis of the partner’s interest and partnership assets pursuant to §722 and §723, respectively.

2. What if the liability was incurred one year before the contribution to the partnership? Compute Partner X’s basis in partnership interest pursuant to §722 and partnership’s basis in real estate pursuant to §723.

Answer rating: 100% (QA)

Answer 1 When the 15 million of debt on the property was incurred three years prior to the contribut... View the full answer