Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Contributing property to your partnership (MS Word)
Contributing property to your partnership (.pdf)
Contributing property to your partnership
Dear Reader:
About the tax aspects of contributing property to a partnership:
In general, when you contribute property to a partnership in
exchange for a partnership interest you do not recognize gain or
loss on the contribution. The basis you had in the property you
contributed becomes both the basis the partnership gets in the
property and the basis you get in the partnership interest you
receive. (However, as discussed below, you may recognize gain if the
contributed property is subject to debt.)
Example.
Jane contributes to the ABC partnership a building valued at
$100,000, with a basis to her of $60,000 in exchange for a 10%
partnership interest. Jane has no gain on the contribution. Jane's
basis in the interest she received and ABC's basis in the building
are both $60,000.
Impact of liabilities.
The situation grows more complex if the property is subject to a
liability. In this case, you are treated as receiving a cash
distribution to the extent of your net relief from liabilities.
Example.
The facts are the same as in the above example, except that the
building is subject to a $20,000 debt. Jane is treated as receiving
a cash distribution of $18,000 because she is “relieved” of a
$20,000 debt when the partnership takes over the building, but she
“picks up” $2,000 of this debt again as a 10% partner. Thus, her net
debt relief is $18,000.
Jane has no gain on the deemed cash distribution because it does not
exceed her basis in her interest. Her basis, however, is reduced by
the $18,000 distribution from $60,000 to $42,000.
Potential for gain.
Under the above rules, gain will be recognized where the debt relief
exceeds the contributing partner's total basis in his interest.
If, in the preceding example, Jane's basis had been $10,000 instead
of $60,000, the $18,000 cash distribution would have exceeded her
basis by $8,000, with the result that $8,000 of gain would be
recognized. (If Jane owned an interest before she contributed the
property, the gain would be recognized only if the deemed cash
distribution exceeds her total basis in her interest.)
Planning to avoid gain on the contribution.
If you're in a situation where gain would be recognized on a
property contribution as explained above, you may be able to take
some steps to avoid the gain recognition. These include contributing
different property subject to less or no debt, paying down the debt,
contributing cash or other property along with the contributed
property, or waiting until after the year-end to make the
contribution if you're expecting an allocation of partnership income
that will increase your basis in your interest. In addition, you may
avoid gain recognition by increasing the portion of the liabilities
allocated to you. The rules for allocating liabilities are complex
and depend on whether the liabilities are recourse or nonrecourse.
However, the rules have some flexibility and it may be possible for
you to be allocated a greater portion of the partnership's
liabilities without incurring a significant risk of loss if the
partnership becomes insolvent.
If you have any questions or wish to discuss any of these matters,
please call.