Question

Agatha contributes land valued at $25,000 (basis = $5,000) subject to a mortgage of $15,000 to the Kristy Partnership for a 50% interest. What is Agatha's gain or loss on the contribution?

a 0
b $10,000 gain
c $12,500 gain

Answer 1

Agatha would have a $10,000 gain on the transaction, which is the difference between the fair market value of the land and her basis, minus the mortgage relief she received when contributing the land to the partnership.

Step-by-step explanation:

The student's question involves the issue of recognizing gain or loss on the contribution of property to a partnership. When Agatha contributes land with a fair market value of $25,000, which is subject to a $15,000 mortgage to the Kristy Partnership for a 50% interest, we must consider both the fair market value of the land and the mortgage when calculating her gain.

The basis of the land is $5,000 for Agatha, but because she is relieved of the $15,000 mortgage, for tax purposes, this amount is considered as having been received for the land. Therefore, Agatha would have a $10,000 gain ($25,000 - $5,000 basis - $10,000 mortgage relief).