Question

"Strom acquired a 25% interest in Ace partnership by contributing land having an adjusted basis of $16,000 and a FMV of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?

1) 0
2) 16,000
3) 26,000
4) 32,000

Answer 1

Strom's basis in the Ace partnership would be $0 after contributing land with a $16,000 adjusted basis and a $24,000 mortgage, which the partnership assumed.

Step-by-step explanation:

The student has asked about Strom's basis in Ace partnership after contributing land to it. When property is contributed to a partnership, the contributor's basis in the partnership interest is usually the adjusted basis of the property contributed. In this case, Strom contributed land with an adjusted basis of $16,000 and a fair market value (FMV) of $50,000. However, since the land was subject to a $24,000 mortgage, which the partnership assumed, Strom's basis in the Ace partnership would be the adjusted basis of the land ($16,000) minus the portion of the mortgage that exceeds the basis, which is $8,000 ($24,000 mortgage - $16,000 basis). Therefore, Strom's basis in Ace would effectively be zero ($0).