Nonrecourse Debt Example

Nonrecourse Debt Example - nonrecourse debt attributable to...

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TAX 6317 ALLOCATION OF NONRECOURSE DEBT EXAMPLE G (General) and L (Limited) form the GL limited partnership evidenced by a partnership agreement that specifies maintenance of capital accounts in accordance with the Section 704 Regulation, allocates liquidation proceeds in accordance with the partners’ positive capital account balances, specifies an unconditional deficit restoration requirement for G, and a qualified income offset for L. The partnership begins operations with the contribution of an old office building owned by G that has a basis of $50,000 a fair market value $275,000 and is subject to a nonrecourse debt of $250,000 for a 25% interest in profits and losses. L contributes cash of $75,000 for a 75% interest in profits and losses. The partnership borrows an additional $100,000 of nonrecourse debt in order to have sufficient funds to renovate the building. At the time of formation, calculate each partner’s share of the $350,000 nonrecourse debt? Since the book value of the building ($275,000) exceeds the
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Unformatted text preview: nonrecourse debt attributable to that property ($250,000) there is no Tier 1 Minimum Gain to allocate. The difference between the contributed nonrecourse debt ($250,000) and G’s adjusted basis in the building ($50,000) or $200,000 is assigned to G as a Tier 2 allocation. The Excess Nonrecourse debt (($250,000 + $100,000 = $350,000) - $200,000 = $150, 000) is allocated through Tier 3 to G and L in accordance with their respective profit ratios, or $37,500 to G and $112,500 to L. At the end of year 5, assume the following balances: Nonrecourse debt $350,000 – unchanged Book value of building $310,000 G’s Remaining Built-in Gain $150,000 How will the partners share this nonrecourse debt? Tier 1 Minimum Gain ($350,000 - $310,000 = $40,000) allocated $10,000 to G and $30,000 to L. Tier 2 Built-in Gain $150,000 (given) Tier 3 Excess Nonrecourse Debt ($350,000 - $40,000 - $150,000 = $160,000) allocated $40,000 to G and $120,000 to L....
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This note was uploaded on 09/16/2011 for the course TAX 6137 taught by Professor Andrewjudd during the Spring '11 term at University of Central Florida.

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