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I have question, My best friend and me formed the GH

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I have question Accountant's...

I have question

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My best friend and me formed the GH Partnership (a general partnership). She contributed $400,000 of cash and has a one-third interest in profits and loss. I contributed Greenacre, which had a fair market value of $2,000,000 and was subject to a $1,200,000 recourse mortgage. Harvey’s basis in Greenacre was $500,000. I have a two-thirds interest in profits and loss. AND I incurred the debt secured by the mortgage last year and used the proceeds to purchase publicly traded securities. What are the tax consequences of the transfer of Greenacre to the partnership?

Accountant's Assistant: Is there anything else important you think the Accountant should know?

That's all why?

Submitted: 8 months ago.Category: Tax
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Customer reply replied 8 months ago
Is he or she working on this?
Answered in 31 minutes by:
12/3/2017
Tax Professional: Lev, Tax Advisor replied 8 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,333
Experience: Taxes, Immigration, Labor Relations
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The transfer of assets to the partnership in exchange for the partnership interest will NOT trigger any tax liability and will NOT be reported on your tax return.

See page 8

https://www.irs.gov/pub/irs-pdf/p541.pdf

Contribution of Property
Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. This applies whether a partnership is being formed or is already operating.

Let me know if that answered your question?

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Customer reply replied 8 months ago
Isn't there implications because the debt was incurred last year. For instance disguised sale and precontibution leveraging of a property
Tax Professional: Lev, Tax Advisor replied 8 months ago

That will affect the basis of the asset within a partnership and the basis of your partnership interest - but that contribution itself will NOT trigger any tax implications.

The IRS publication I referenced above clearly regarding that - no gain and no loss for neither the partnership nor the partner.

If the property later will be sold - the situation will be different.

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Customer reply replied 8 months ago
ok but isn't there gain to be recognized since the basis of green acre is less than the recourse debt?
Customer reply replied 8 months ago
won't part of the transaction be considered a sale and the rest a contribution?
Customer reply replied 8 months ago
the fact that one partner has more than an 50% interest trigger any controlling issues?
Tax Professional: Lev, Tax Advisor replied 8 months ago

ok but isn't there gain to be recognized since the basis of green acre is less than the recourse debt?

The IRS is VERY clear - there is NO gain.

The fair market value of the property with recourse mortgage is $2,000,000 MINUS $1,200,000 = $800,000.

The basis is $500,000.

So the property basis for the partnership will be the lesser of these amounts.

Still - the IRS publication is clear - there is NO gain.

and won't part of the transaction be considered a sale and the rest a contribution?

There is no deemed sale based on your information.

It might be if the property will be distributed to another partner (not to the partner who contributed that property.

and the fact that one partner has more than an 50% interest trigger any controlling issues?

Yes - that will be controlling partner. But that makes NO difference on treatment for the contribution.

Here is the statute for your reference

https://www.law.cornell.edu/uscode/text/26/721

(a) General rule

No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.

and regulations

https://www.law.cornell.edu/cfr/text/26/1.721-1

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Customer reply replied 8 months ago
Per my earlier point isn't there implications because the debt was incurred last year. For instance disguised sale and precontibution leveraging of a property, you stated that, That will affect the basis of the asset within a partnership and the basis of your partnership interest. Can you tell me based on the facts how it will be affected?
Customer reply replied 8 months ago
referencing the link you sent, if the transfer of property by the partner to the partnership results in the receipt by the partner of money or other consideration, including a promissory obligation fixed in amount and time for payment, the transaction will be treated as a sale or exchange under section 707 rather than as a contribution under section 721. For the rules governing the treatment of liabilities to which contributed property is subject, see section 752 and § 1.752-1." in green acre there is consideration given for the 1/3 % that is being allocated for recourse debt to the other partners isn't it?
Tax Professional: Lev, Tax Advisor replied 8 months ago

The disguised sale is the situation when you as a partner make contribution to the partnership followed by a distribution of different property from the partnership - there is no any distribution in your example - thus your concern about the disguised sale has no ground.

Your last statement includes the receipt by the partner of money or other consideration - and NONE was received

You are contributing the property with FMV of $800,000 - with all recourse debts considered here.

Thus - NO consideration was received by the partner.

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Customer reply replied 8 months ago
Per my earlier point isn't there implications because the debt was incurred last year. For instance disguised sale and precontibution leveraging of a property, you stated that, That will affect the basis of the asset within a partnership and the basis of your partnership interest. Can you tell me based on the facts how it will be affected?
Tax Professional: Lev, Tax Advisor replied 8 months ago

Per my earlier point isn't there implications because the debt was incurred last year.

There is no tax implication based on timing of the debt...

The disguised sale situation would be only when the debt is MORE than the FMV of the property.

Can you tell me based on the facts how it will be affected?

The fair market value of the property is $2,000,000.

The fair market value of the property with recourse mortgage is $2,000,000 MINUS $1,200,000 = $800,000.

The basis is $500,000.

So the property basis for the partnership will be the lesser of $2,000,000 and $500,000 = $500,000.

The basis in the partnership interest will be the lesser of $800,000 and $500,000 = $500,000.

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Tax Professional: Lev, Tax Advisor replied 8 months ago

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all Social Security / Tax related issues.
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