Partner A contributes land with a basis of $40,000 and FMV of $100,000 to a partnership for a 50% interest. The land is subject to a $20,000 mortgage which the partnership assumes. What is Partner A's initial outside basis?

Answer options:

$40,000

$20,000

$30,000

$100,000

How to approach this question

Formula: Adjusted Basis of Property - Liability Assumed by Others + Share of Liabilities. $40k - $20k (total debt) + $10k (50% share) = $30k.

Full Answer

C.$30,000✓ Correct

Initial Basis = Basis of contributed property ($40,000) less liability assumed by partnership ($20,000) plus partner's share of partnership liabilities (50% of $20,000 = $10,000). $40,000 - $20,000 + $10,000 = $30,000.

Common mistakes

Forgetting to add back the partner's share of the liability.

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