Question

Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2013. Sam's uncle purchased the land in 1986 for $30,000. The land was worth $100,000 when Sam's uncle died. The fair market value of the land was $200,000 at the date it was contributed to the LLC.

Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew also will contribute $150,000 of cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.


How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?

Answer 1

How much gain or income will Sam recognize on his contribution of the land to the LLC?

• $0

What is the character of any gain or income recognized?

• None, since no gain or loss is recognized.

Step-by-step explanation:

§ 721 establishes that when partners' contribute assets (e.g. property) to a partnership or limited liability company, they do not need to recognize any gain or loss regarding the contribution.

In this case, Sam is contributing property to an operating partnership, so he does not need to recognize any gain or loss. His basis on the partnership will be $100,000 which is the current basis on the land. Sam's basis on the land is equal to the fair market value of the land when his uncle died. His uncle's estate was taxed back then for the gain between the original purchase price and the FMV.