Kay and Larry each contribute property to become equal partners in the KL General Partnership. Kay contributes office furniture with an adjusted basis of $40,000 and an FMV of $50,000, which she has depreciated using MACRS. Larry contributes land with a basis of $60,000 and an FMV of $50,000, which he had been holding as an investment. The partnership will use the land as a parking lot for their

Question

business.

a) What is the partnership's basis in each of the two pieces of property?
b) If the land that Larry contributed is sold four years after the contribution for $45,000, what is the amount and character of the gain or loss which Larry should report?

Answer 1

a) The partnership basis for the two assets is a carryover basis from the contributor partners. The office furniture has a basis of $40,000 and the land has a basis of $60,000.

b) Precontribution loss of $10,000 is allocated to Larry, and it is a capital loss because Larry held the land as a capital asset prior to its contribution. Capital loss property retains its character for five years after a contribution to a partnership.

The $5,000 postcontribution loss is divided equally between the partners. Since this loss accrued while the partnership held the land as Sec. 1231 property, Larry's $2,500 share of this loss is a Sec. 1231 loss.