Question

Betty contributed land with a $6,000 basis and a $10,000 FMV to the ABC Partnership in Year 1. In Year 2, the land was distributed to Sally, another partner in the partnership. At the time of the distribution, the land had a $12,000 fair market value, and Sally had a $30,000 basis for her partnership interest. What gain is recognized by Betty on the distribution? What is Sally’s basis for the distributed land?

Answer 1

a. Gain recognized by Betty on the distribution is $4,000.

b. Sally’s basis for the distributed land is therefore $10,000.

Step-by-step explanation:

a. What gain is recognized by Betty on the distribution?

When an asset contributed by a partner to a partnership is distributed, the gain or loss to be recognized by the partner that contributed the asset is the difference between the fair market value (FMV) and the basis of the asset. Therefore, we have:

Gain recognized by Betty = FMV of the land - Basis of the land = $10,000 - $6,000 = $4,000

b. What is Sally’s basis for the distributed land?

When an asset of partnership is distributed to another partner in a partnership, the partner's basis for the distributed asset is the FMV of the distributed asset.

Since the FMV of the land contributed by Bettt but now distributed to Sally is $10,000, Sally’s basis for the distributed land is therefore $10,000.