62 Example of Sale of Partnership Interest cont Step 1 Calculate GainLoss as if

62 example of sale of partnership interest cont step

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62Example of Sale of Partnership Interest (cont.)Step 1: Calculate Gain/Loss as if hot assets were sold:Amount realized on sale of hot assets: $10,000 §1245 recapture PLUS $350,000 inventory PLUS $22,000 receivables (classified as inventory) = $382,000;$382,000 x 20% Less: Inside basis of hot assets: $10,000 §1245 recapture PLUS basis of inventory $275,000 PLUS basis of receivables $22,000 = $307,000;$307,000 x 20% $76,400(61,400)$15,000 Ordinary Income
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63Example of Sale of Partnership Interest (cont.)Step 2: Determine amount realized on sale of non-hot assets:Actual amount realized:Cash received$160,000Relief of Partnership debt6,000Less: Amount realized for hot assets (FMV)$166,000 $89,600Amount realized for sale of non-hot assets(76,400)
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64Example of Sale of Partnership Interest (cont.)Step 3:Allocate Partner's outside basis between sale of hot assets non-hot assetsPartner's outside basis immediately prior to saleLess: Basis used to calculate G/L on sale of hot asset$130,000 $68,600Basis allocated to sale of non-hot assets61,400
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65Example of Sale of Partnership Interest (cont.)Step 4:Calculate capital Gain/Loss on sale of non-hot assetsAmount realized on sale of non-hot assets (from Step 2)Less: Remaining outside basis after sale of hot assets (from Step 3)$89,600 $21,000Capital gain (loss)68,600
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Sale of a Partnership Interest: BuyerBuyer’s basisCost + share of liabilities Pshp inside basis is unaffectedSucceeds to the old partner’s §704(c) built-in gains and losses, etc.Could be a big surprise!If a §754 election is in effect, triggers §743(b) adjustment§743(b) entitles the new partner to step-up his share of inside basis of pshp assets as if he bought the asset directlyExample
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Sale of a Partnership Interest: BuyerExampleR and S are equal owners in two man pshp Pshp owns one asset, land (FMV $100,000, AB $40,000)S sells his interest to B for $50,000If no §754, B’s share in basis of land is $20,000 and sale of land for $100,000 results in gain to B of $30,000If §754, B’s share of basis is stepped up to FMV $50,000 and B’s gain is zero Adjustment equalizes the difference between the inside and outside basis
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§754 is a two edged sword
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§754 Optional Basis Adjustment on Sale§743(b) General ruleBasis adjustment allowed upon sale, exchange, or death of partnerGenerally must elect under §754 (irrevocable)Adjustment (increase or decrease)Partner's basis for his interest (outside basis)Partner's share of pshp's basis for assets (inside basis)§743(b) adjustment to basis of partnership assets
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Allocation of §743(b) AdjustmentAdjustment allocation (§755)Divide all property between two classes(1) §1231 & capital assets and (2) All other assetsAllocate between classes & then within classes
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Allocation of §743(b) AdjustmentAllocation between two classes Allocate based on the contribution of the class to the entire net appreciation or depreciation of the partnership assets
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Allocation of §743(b) AdjustmentAllocation within classesAllocate adjustment within each class based on the contribution of EACH asset to the total appreciation or deprecation of the class.
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