On September 1, 2013, Julie’s basis in her partnership interest was $75,000. In a distribution in liquidation of her entire interest on that date, she received properties A and B, neither of which were inventory or unrealized receivables. On September 1, 2013, property A had an adjusted basis to the partnership of $35,000 and a fair market value of $75,000. Property B had an adjusted basis to the partnership of $15,000 and a fair market value of $25,000. Based on this information, what was Julie’s basis in property A immediately after the distribution?
If a partner’s interest is liquidated solely through a distribution of partnership property other than money, no gain is recognized. If the partnership distributes property other than money, the partner’s basis in the partnership must be transferred to the distributed assets. When a liquidation occurs and the partner’s basis in the partnership exceeds the partnership’s basis in the distributed assets, the excess of the partner’s basis in the partnership must also be allocated among the distributed assets. Any basis increase required is allocated first to properties with unrealized appreciation in proportion to the respective amounts of unrealized appreciation inherent in each property (but only to the extent of each properties unrealized appreciation). Any remaining increase is then allocated in proportion to the properties’ fair market values. Property A is first assigned its basis of $35,000 and property B is assigned $15,000. Another $25,000 ($75,000 partnership basis minus $50,000 AB assigned to properties) must be allocated to the two properties. Property A is allocated $20,000 [$40,000 increase in FMV over $50,000 ($40,000 appreciation of A + $10,000 appreciation of B) total increase in FMV times $25,000]. Thus, property A is assigned a basis of $55,000 ($35,000 initial basis + $20,000 based on increase in FMVs).