Partnership Distribution

[Bill (Wisconsin)]

Partnership is LLP with Man and several children consisting the partners. Partnership owned 2 buildings at start of 2008.

The Man (father) told me during 2008 the partnership sold one of the two buildings (had been a single family home being rented) to Son #1. Sale was for $160,000; land = $35,000; house was originally $120,000 with $10,000 depreciation = $110,000 adjusted basis. So, total adjusted basis of house and land is $145,000.

My understanding is that Son #1 will be renting out this house.

Is this treated as:

A ) a sale (partnership to recognize $15,000 of profit)

B ) a partner contribution of $160,000 of cash and a tax-free distribution of the house and land

Any other help would be appreciated. I've worked with a couple partnerships but have not dealt with a transaction like this yet.

Bill

[Terry D EA]

By your post, the partnership owned the home and then sold it to the son which is a sale of a business asset with a gain of 15K and the son now owns the home. I don't see how choice B would work at all.

Terry D.

[jasdlm]

Might seem like a silly question, but did Son #1 pay the partnership for the house?

[BulldogTom]

Might seem like a silly question, but did Son #1 pay the partnership for the house?

That is not a silly question, it gets to the heart of the matter. Did he pay the partnership?

Tom

Lodi, CA

[Bill (Wisconsin)]

Yes, son #1 did transfer $160,000 of cash into the partnership at the closing when the partnership transferred the title to son #1.

Bill

[Bill (Wisconsin)]

Pub 541, pg 4 under Partnership Distribution:

"Effect on partner's basis. A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. See 'Adusted Basis' under 'Basis of Partner's Interest', later."

"Effect on partnership. A partnership generally does not recognize any gain or loss because of distributions it makes to partners. The partnership may be able to elect to adjust the basis of its undistributed property."

Those two paragraphs make me feel the transaction is handled as (, a partner contribution of $160,000 and a distribution of property with an adjusted basis of $145,000. But words like "generally" give me pause.

The Pub talks that treatment of appreciated inventory gets special treatment, but I don't see how this asset could be "inventory". The partnership had been renting out this single family home. It seems that a tenant moved out, and the partnership cleaned it up. I'm not sure how the deal was arranged between the eldest son (a 12.5% partner) and the partnership (or at least the main managing partner, dad).

Further, this is not a liquidating distribution -- son #1 (eldest son) is still a partner.

Think I just found something at the bottom of pg 6 "Transactions between Partner and Partnership" point #2 -- it appears now this maybe should be treated as a sale. Further, the right column on pg 7 "Gains" -- since this is a family partnership (all partners each indirectly own 100% of the partnership), whether the gain is a capital gain or ordinary income seems to come down to why son #1 acquired the property from the partnership (gotta read through Pub 544 some more).

Bill