Question

Last year, Darby contributed land (basis of $60,000, fair market value of $80,000) to the Seagull LLC in exchange for a 25% interest in the LLC. In the current year, the LLC distributes the land (now worth $82,000) to Shelby, who is also a 25% owner. Immediately prior to the distribution, Darby’s basis in the LLC was $70,000, and Shelby’s basis in the LLC was $110,000. The partnership owns no hot assets. How much gain or loss must be recognized and by whom? What is Shelby’s basis in the property she receives and Darby’s basis in her partnership interest following the distribution?

Answer 1

Neither Darby nor Shelby recognizes gain upon the distribution of the land. Shelby's basis in the land is limited to the fair market value of $82,000. Darby's basis in the partnership interest is reduced to $10,000 following the distribution.

Step-by-step explanation:

The question involves calculating the gain or loss recognized on a property distribution by an LLC and determining the basis for Shelby, the recipient member, and Darby, the distributing member, following the distribution. Since the LLC owns no hot assets, which are typically items of inventory or unrealized receivables, the distribution is treated as a non-taxable event to the extent of the recipient member's basis. Neither Darby nor Shelby recognizes any gain upon the distribution of the land.

Shelby's basis in the land received is her basis in the LLC interest immediately before the distribution, which is $110,000. However, since the fair market value of the land is less than her basis in the LLC, her basis in the land becomes limited to its fair market value, or $82,000. Darby's basis in her partnership interest following the distribution is reduced by the basis of the land that was distributed to Shelby, so Darby's new basis will be $70,000 - $60,000 = $10,000, assuming the basis of the land was $60,000 when Darby contributed it to the LLC.