ExpertMedium1 markMultiple Choice
CPA · Question 32 · Area 3: Entity Tax Compliance
A partnership distributes cash of $20,000 and property with a basis of $10,000 (FMV $15,000) to a partner in a non-liquidating distribution. The partner's outside basis before distribution is $25,000. What is the partner's basis in the property received?
A partnership distributes cash of $20,000 and property with a basis of $10,000 (FMV $15,000) to a partner in a non-liquidating distribution. The partner's outside basis before distribution is $25,000. What is the partner's basis in the property received?
Answer options:
A.
$10,000
B.
$15,000
C.
$5,000
D.
$0
How to approach this question
1. Ordering Rule: Cash reduces basis first.<br/>2. Initial Basis: $25,000.<br/>3. Less Cash: $20,000. Remaining Basis = $5,000.<br/>4. Property Basis: Generally carryover ($10,000), BUT limited to remaining outside basis ($5,000).<br/>5. Result: Partner takes $5,000 basis in property. Outside basis becomes $0.
Full Answer
C.$5,000✓ Correct
1. Reduce basis by cash: $25,000 - $20,000 = $5,000.<br/>2. Assign basis to property: Lesser of partnership's basis ($10,000) or remaining outside basis ($5,000).<br/>3. Basis in property is $5,000.
Common mistakes
Applying property basis before cash or ignoring the limitation.
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