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
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)
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
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
Sale of a Partnership Interest: Buyer•Buyer’s basis•Cost + share of liabilities •Pshp inside basis is unaffected•Succeeds 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 directly•Example
Sale of a Partnership Interest: Buyer•Example•R 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 $50,000•If 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 $30,000•If §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
§754 is a two edged sword
§754 Optional Basis Adjustment on Sale•§743(b) General rule•Basis adjustment allowed upon sale, exchange, or death of partner•Generally 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
Allocation of §743(b) Adjustment•Adjustment allocation (§755)•Divide all property between two classes•(1) §1231 & capital assets and •(2) All other assets•Allocate between classes & then within classes
Allocation of §743(b) Adjustment•Allocation between two classes •Allocate based on the contribution of the class to the entire net appreciation or depreciation of the partnership assets
Allocation of §743(b) Adjustment•Allocation within classes•Allocate adjustment within each class based on the contribution of EACH asset to the total appreciation or deprecation of the class.
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- Spring '18
- Taxes, basis, partner