Dan purchases a 25% interest in the Haymarket Partnership for $20,000 on January 1, and begins to materially participate in the partnership's business. The Haymarket Partnership uses the calendar year as its tax year. At the time of the purchase, the Haymarket Partnership has $2,000 in liabilities, and Dan's share is 25%. During the year, the Haymarket Partnership incurs $100,000 in losses and
its liabilities increase by $4000. What is Dan's basis in his partnership interest on December 31?
What will be an ideal response?
Purchase of partnership interest $20,000
Plus: share of liabilities (0.25 × $2,000) 500
Share of liability increase (0.25 × $4,000) 1,000
December 31 basis before losses $21,500
Minus: maximum loss to be deducted (21,500)
Basis in partnership interest on December 31 $ 0
Dan is allocated $25,000 (0.25 × $100,000) of the partnership losses, but he is limited to the amount of the basis in his partnership interest before deduction for the losses. The remaining $3,500 in losses carry over to a subsequent year and are deducted when he has sufficient basis in his partnership interest.
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