In general, when you contribute property to a partnership in exchange for a partnership interest there is no gain or loss on the contribution. The basis you had in the property you contributed becomes both the basis the partnership gets in the property and the basis you get in the partnership interest you receive. However, gain may result if the contributed property is subject to debt.
The situation grows more complex if the property is subject to a liability. In this case, you are treated as getting a cash distribution to the extent of your net relief from liabilities. A taxable gain will have to be recognized where the debt relief exceeds the contributing partner’s total basis in his interest.
The rules for allocating liabilities are complex and depend on whether the liabilities are recourse or nonrecourse. However, the rules have some flexibility and it may be possible for you to be allocated a greater portion of the partnership’s liabilities without incurring a significant risk of loss if the partnership becomes insolvent.
If you have any questions or wish to discuss any of these matters, please call.
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About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.
