A partner contributes property with an adjusted basis of $20,000 and a fair market value of $50,000 to a partnership in exchange for a 50% interest. The property is subject to a liability of $10,000, which the partnership assumes. What is the partner's initial outside basis in the partnership?

Answer options:

$20,000

$15,000

$10,000

$50,000

How to approach this question

Formula: Basis of Asset - Debt Assumed by Partnership + Partner's Share of Partnership Debt.

Full Answer

B.$15,000✓ Correct

The partner's basis is the adjusted basis of the property contributed ($20,000) reduced by the net relief of liability. The partner is relieved of $10,000 debt but assumes 50% of it back ($5,000). Net reduction = $5,000. Basis = $20,000 - $5,000 = $15,000.

Common mistakes

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

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