Question

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $59,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $9,500 and a building he bought as a storefront for the motorcycles. The building has a FMV of $54,000, an adjusted basis of $39,000, and is secured by a $44,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

Answer 1

Brett's outside tax basis in the LLC would be $78,000, which is the sum of his cash contribution, the adjusted basis of the property he contributed, and his 50% share of the LLC's $59,000 nonrecourse loan.

Step-by-step explanation:

When Brett decides to form a new motorcycle business as an LLC with Erica, his outside tax basis in his LLC interest will be calculated by adding the cash he contributes, the adjusted basis of the property he contributes, and his share of the nonrecourse debt the LLC assumes. In this case, Brett contributes $9,500 in cash and a building with a Fair Market Value (FMV) of $54,000, but an adjusted basis of $39,000. The building is secured by a $44,000 nonrecourse mortgage which the LLC will assume. Brett's outside tax basis would thus be the sum of his cash contribution ($9,500), the adjusted basis of the property ($39,000), plus his share of the nonrecourse debt. Assuming Brett and Erica share equally in the LLC, Brett's allocated share of the LLC's $59,000 nonrecourse bank loan would be $29,500 (half of $59,000). Thus, his total outside tax basis in the LLC would be $9,500 (cash) + $39,000 (adjusted basis of the building) + $29,500 (half of the nonrecourse loan) = $78,000.

Answer 2

$58,500

Step-by-step explanation:

The outside basis is defined as the tax basis that a partner has on the partnership. To find it, the value of all the resources contributed by the partner is taken and the debt relief and any debt assigned is subtracted. To solve this exercise, we should follow these steps:

1. Determine the contributed capital.

According to the problem statement, Brett provided cash ($ 9,500) and a building (here the value of the adjusted base, $ 39,000, is taken). Therefore, the total contributions are $48,500.

2. Calculate capital increases.

The partnership obtained a loan for $59,000, which was shared equally among the partners. Therefore, Brett received 50%, that is, $29,500.

Now, we must add the contributed capital plus capital increases:

`48,500+29,500=78,000`

3. Calculate mortgage debt issues.

The nonresource mortgage is 44,000, a value that exceeds the basis of the contributed property. In that case, the surplus is taxed to the contributing partner. To determine it, simply subtract the nonresource mortgage less adjusted basis of the building:

`44,000-39,000=5,000`

On the other hand, the remaining mortgage on the building is calculated, by dividing the value of the adjusted base of the property, in this case, 39,000 by 2, which results in 19,500.

Therefore, mortgage debt issues are equivalent to:

`5,000+19,500=24,500`

We add the contributed capital plus capital increases plus mortgage debt issues:

`78,000+24,500=102,500`

4. Subtract debts.

The partnership assumes the nonrecourse mortgage (which is computed as a debt) for 44,000. Because this component is not covered entirely by Brett, then this amount must be deducted from his individual tax base.

Therefore:

`102,500-44,000=58,500`

58,500 is Brett´s outside tax basis in his LLC interest.

On a balance sheet, we can see it as follows:

Particulars Amount in $

Cash 9,500

+Adjusted basis of the 39,000

building

+50% profit sharing ratio 29,500

+Nonrecourse mortgage 5,000

less adjusted basis

+Remaining mortgage on 19,500

building

TOTAL 102,500

-Debt on building (44,000)

Outside tax basis 58,500