Question

Liz and John formed the equal LJ Partnership on January 1 of the current year. Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000 and an adjusted basis of $20,000. John had previously used the equipment in his sole proprietorship.a. How much gain or loss will Liz, John, and the partnership realize?b. How much gain or loss will Liz, John, and the partnership recognize?c. What bases will Liz and John take in their partnership interests?d. What bases will LJ take in the assets it receives?e. Are there any differences between inside and outside basis? Explain.f. How will the partnership depreciate any assets it receives from the partners?

Answer 1

Answer:

a. Liz = $15,000; John = $150,000; and Partnership = $165,000

b. No gain or loss will be recognized.

c. Liz = $155,000; and John = $175,000

d. $330,000

e. Yes, there are.

f. The method of depreciation and remaining depreciable useful life of the property used by the partner that transfer the asset will continue to be used by the partnership.

Explanation:

a. How much gain or loss will Liz, John, and the partnership realize?

Amount to realize = Asset fair market value - adjusted basis

Amount to realize by Liz = $90,000 - $75,000 = $15,000

Amount to realize by John = $170,000 - $20,000 = $150,000

Amount to realize by Partnership = ($90,000 + $170,000) – ($75,000 + $20,000) = $165,000

b. How much gain or loss will Liz, John, and the partnership recognize?

The general rule under Sec. 721 of partnership states that no gain or loss should be recognized on the property is transferred by a partner in exchange for an interest in a partnership.

Therefore, Liz, John, and the partnership recognize will not recognize any gain or loss.

c. What bases will Liz and John take in their partnership interests?

Bases to take = Cash contributed + Asset adjusted basis

Bases to take by Liz = $80,000 + $75,000 = $155,000

Bases to take by John = $0 + $175,000 = $175,000

d. What bases will LJ take in the assets it receives?

Bases taken by a partnership in received assets is the addition of bases taken by all partners in a partnership. Therefore,

Bases taken by LJ in received assets = $155,000 + $175,000 = $330,000

e. Are there any differences between inside and outside basis? Explain.

Yes, there are.

The inside basis refers to the tax basis of partnership in each of the assets contributed to the partnership by partners, while the outside basis refers to the tax basis of the interest of each partner in a partnership as result of asset contributed to the partnership.  

Therefore, inside basis can be considered to be the addition of each individual outside basis in a partnership.

f. How will the partnership depreciate any assets it receives from the partners?

When a partner contributes a depreciable property to a partnership, the partnership is considered to have taken over from the partner that contributed the asset. Therefore, the method of depreciation and remaining depreciable useful life of the property used by the partner that transfer the asset will continue to be used by the partnership.

Answer 2

Answer:

A partnership assumes the same depreciation schedule of the contributing party. If this were not  so, individuals could accelerate depreciation rates and bypass taxes.

Explanation:

Here, transfer included money; therefore L will recognize $15,000 as gain on property. J  recognizes the $150.000 gain on equipment because it was used in a sole proprietorship. The  partnership will not recognize any gain loss.

In the formation of a partnership there is no gain to be recognized.

Both parties will take a basis of the property after deducting any realized gain. L takes a basis of  the cash and property. which is $155,000. While J takes a basis of the property after deducting  realized gain, therefore j’s bases is $20.000.

The company will carry the basis at the same rate the partners have in the property. which is  $175,000.

The inside basis is the basis the partnership carries assets at. This is the donated value of

property given at formation plus any additions throughout the company’s life,

The outside basis is the basis the partners carry the property at. This basis is changed by the

partnership’s actions, through improvements, distributions, and contributions.