A acquires a 20-percent interest in a partnership by contributing property to it. At the time of the contribution the property has a fair market value of 10,000, an adjusted basis to A of 4,000, and is subject to a mortgage of 2,000. The partnership assumes payment of the mortgage, so A contributes property with a net value of 8,000.
Under section 722, a contributing partner’s basis in the partnership interest generally equals the adjusted basis of the contributed property. That starting basis is 4,000. But when the partnership assumes a liability of the contributing partner, section 752(b) treats the portion of the debt shifted to the other partners as a deemed cash distribution to the contributing partner, which reduces basis under section 733.
Here the other partners bear 80 percent of the 2,000 mortgage — the 80-percent share of partnership liabilities held by the noncontributing partners. That 1,600 is treated as a distribution of money to A. Subtracting the 1,600 deemed distribution from the 4,000 carryover basis leaves A with a basis in the partnership interest of 2,400.
Under section 722, A’s basis in the partnership interest begins as the adjusted basis of the contributed property — 4,000 — not its 10,000 fair market value.
When the partnership assumes A’s 2,000 mortgage, the portion of the liability shifted to the other partners is treated under section 752(b) as a distribution of money to A.
The other partners bear 80 percent of the 2,000 mortgage, so 1,600 is treated as a distribution to A; A’s own 20-percent share of the debt does not reduce basis.
Subtracting the 1,600 deemed distribution from the 4,000 carryover basis leaves A with a 2,400 basis in the 20-percent partnership interest.
