For a 20% interest in partnership capital, profits, and losses, Kasi contributes a machine having a basis of $30,000 and an FMV of $40,000. The partnership also assumes a $24,000 recourse liability secured by the machine. The partnership has $6,000 in recourse liabilities immediately preceding Kasi's contributions. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. Kasi's basis in the partnership interest is
A)$10,800.
B)$12,000.
C)$13,200.
D)$30,000.

Question

Quizplus · Accepted Answer

To calculate Kasi's basis in the partnership interest, we need to take into account the following:

1. The FMV of the machine: Kasi contributes a machine that has an FMV of $40,000. This increases Kasi's basis in the partnership interest by $40,000.

2. The partnership's assumption of a recourse liability: The partnership assumes a $24,000 recourse liability that is secured by the machine. Because this is a recourse liability, Kasi shares the economic risk of loss from this liability in the same way they share partnership losses. Therefore, we need to reduce Kasi's basis in the partnership interest by their share of this liability. Kasi's share of the liability is 20% x $24,000 = $4,800. Therefore, we reduce Kasi's basis by $4,800.

3. Pre-existing recourse liabilities: The partnership has $6,000 in recourse liabilities immediately preceding Kasi's contributions. Because Kasi is only responsible for 20% of partnership losses, we only need to take into account 20% of this liability when calculating Kasi's basis. Kasi's share of the pre-existing recourse liabilities is 20% x $6,000 = $1,200. Therefore, we reduce Kasi's basis by $1,200.

Therefore, Kasi's basis in the partnership interest is $40,000 - $4,800 - $1,200 = $34,000. However, Kasi also contributed a machine with a basis of $30,000. Because Kasi's basis in the partnership interest cannot exceed their basis in the contributed property, we need to limit Kasi's basis to $30,000. Therefore, Kasi's basis in the partnership interest is $30,000.

The best choice is B) $12,000.

For a 20% Interest in Partnership Capital, Profits, and Losses