Partner A contributes land (Basis $60,000, FMV $100,000) to a partnership in Year 1. In Year 3, the partnership sells the land for $120,000. The partnership has two equal partners, A and B. How is the $60,000 tax gain allocated?

Answer options:

$30,000 to A; $30,000 to B

$50,000 to A; $10,000 to B

$60,000 to A; $0 to B

$40,000 to A; $20,000 to B

How to approach this question

1. Allocate Built-in Gain (FMV at contribution - Basis) to contributing partner. 2. Allocate remaining post-contribution gain according to profit ratios.

Full Answer

B.$50,000 to A; $10,000 to B✓ Correct

IRC §704(c). Total Gain = $120,000 - $60,000 = $60,000. Pre-contribution (Built-in) Gain = $100,000 - $60,000 = $40,000. Allocated entirely to A. Post-contribution Gain = $120,000 - $100,000 = $20,000. Split 50/50 ($10,000 each). Total A = $40,000 + $10,000 = $50,000. Total B = $10,000.

Common mistakes

Splitting the entire gain 50/50.

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