Question

David contributes investment land with a basis of​ $24,000 and an FMV of​ $40,000 to a partnership for a​ 10% interest in partnership​ capital, profits, and losses. The land is subject to a​ $30,000 recourse​ liability, which is assumed by the partnership. The partnership has other recourse liabilities of​ $18,000. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. David must recognize a
a. $3,000 capital gain.
b. $3,000 capital loss.
c. $1,200 capital gain.
d. $1,200 capital loss.

Answer 1

Answer:

C) $1,200 capital gain.

Explanation:

David's basis  on the land was $24,000

liability assumed by other partners = $30,000 x  (1 - 10%) = $27,000

liability assumed by  David on the partnership's other liabilities = $18,000 x 10% = $1,800

David's gain = liability assumed by other partners ($27,000) - land basis ($24,000) - additional liability assumed by David ($1,800) = $1,200 gain

When a partner contributes property to a partnership, his/her gain or loss must be determined using the asset's basis, not the fair market value.