Outside Basis

An investor contributes to a limited partnership a parcel of land with a fair market value of $50,000 and an adjusted basis of $30,000. The partnership assumes no debt in connection with the contribution. What is the investor's at-risk amount from this contribution? (Figures are illustrative only.)

1. A.$50,000, the fair market value of the landWrong. Fair market value is not the measure used; at-risk basis follows adjusted basis, the same figure carried into the partner's outside basis.
2. B.$20,000, the built-in gain on the landWrong. The built-in gain is not itself at-risk basis; it is the excess of value over the basis actually used for the at-risk computation.
3. C.$30,000, the adjusted basis of the landCorrect. At-risk basis from a contributed asset equals its adjusted basis, not its fair market value.
4. D.$0, because property contributions, unlike cash, never create at-risk basisWrong. Contributed property creates at-risk basis measured at adjusted basis; only cash is excluded from that rule, not property.

Why: At-risk basis from a property contribution is measured by the property's adjusted basis, the same starting point used for the partner's outside basis, not by its market value.

A limited partner's Schedule K-1 reports her capital account balance, maintained under the partnership's books using tax-basis or Section 704(b) book methods. How does this reported capital account relate to her adjusted outside tax basis in her partnership interest, which governs her loss limitation?

1. A.They are always identical figures; whatever capital account balance appears on her K-1 is by definition also her outside tax basis for loss limitation purposes.Wrong. Capital account and outside tax basis are related but distinct figures that can diverge, not automatically identical.
2. B.Her outside tax basis is simply her capital account balance divided by her ownership percentage in the partnership.Wrong. This is a fabricated formula with no basis in how capital account and outside tax basis actually relate.
3. C.The two are related but distinct figures tracked separately; her capital account, as reported on the K-1, does not necessarily equal her outside tax basis, since outside basis also reflects her share of partnership liabilities and can diverge from the capital account over time.Correct. Capital account and outside tax basis are related but distinct, diverging because outside basis also reflects partnership liabilities.
4. D.Capital account balances are purely optional disclosures with no defined relationship to basis at all, appearing on K-1s only as a courtesy and carrying no analytical meaning.Wrong. Capital accounts are a meaningful, defined figure; they are simply not interchangeable with outside basis.

Why: Capital account and outside tax basis are related but distinct figures tracked separately; her capital account, as reported on the K-1, does not necessarily equal her outside tax basis, since outside basis also reflects her share of partnership liabilities and can diverge from the capital account over time.

An investor purchases a limited partnership interest on the secondary market for a price well above the seller's own outside basis in that interest, reflecting substantial appreciation in the partnership's underlying real estate since it was originally acquired. Without any special election, the buyer's share of the partnership's inside asset basis remains the old, lower historical figure, mismatched with the higher price she actually paid. What election is available to align the partnership's inside asset basis with what the buyer actually paid?

1. A.No such election exists; a transferee partner is permanently bound to compute her share of depreciation and gain using the same historical inside basis figures as the seller, regardless of what she paid.Wrong. A Section 754 election exists precisely to address this mismatch; the buyer is not permanently bound to the seller's historical figures.
2. B.The buyer can unilaterally elect on her own personal tax return to use a higher inside basis figure for the partnership's assets, without any action required by the partnership itself.Wrong. The Section 754 election is made by the partnership, not unilaterally by an individual transferee partner.
3. C.The mismatch resolves itself automatically after five years, at which point the partnership's inside basis in its assets is deemed to equal what each partner individually paid for her interest.Wrong. There is no automatic multi-year reset; a Section 754 election is required to make any inside basis adjustment.
4. D.The partnership can make a Section 754 election, which allows an optional step-up (or step-down) of the partnership's inside basis in its assets, specifically for the transferee partner, to better reflect the price she actually paid for her interest.Correct. A Section 754 election allows an optional inside basis adjustment for the transferee partner.

Why: The partnership can make a Section 754 election, which allows an optional step-up (or step-down) of the partnership's inside basis in its assets, specifically for the transferee partner, to better reflect the price she actually paid for her interest.

A limited partner's outside (tax) basis in her partnership interest is $60,000, which includes her $18,000 share of the partnership's nonrecourse debt that does not meet the qualified nonrecourse financing exception. Her at-risk amount, which excludes that $18,000 of nonrecourse debt, is $42,000. The partnership allocates her a $50,000 loss for the year, and she has no other passive income. How much of the $50,000 loss can she currently deduct against her salary and portfolio income? (Figures are illustrative only.)

1. A.$50,000 -- her outside basis of $60,000 comfortably covers the full allocated loss.Wrong. Basis is only the first of three sequential tests; the loss still has to clear the at-risk and passive-activity limitations.
2. B.$0 -- the loss has to clear basis, then at-risk, then the passive-activity test in sequence; it fails the $42,000 at-risk ceiling, and because she has no other passive income, whatever survives at-risk is suspended as passive with nothing to offset it.Correct. All three sequential tests -- basis, at-risk, passive-activity -- must be satisfied, and the absence of other passive income suspends the loss entirely.
3. C.$42,000 -- that is her at-risk amount, and at-risk is the final limitation applied to direct participation program losses.Wrong. At-risk is not the final gate; a limited partner's interest is passive by default and still needs passive income to release the loss.
4. D.$8,000 -- that is the portion disallowed by the at-risk test, implying the remaining $42,000 is currently deductible.Wrong. Surviving the at-risk test does not make a loss currently deductible; it still must clear the separate passive-activity test.

Why: Deductibility of a direct participation program loss runs through three independent, sequential gates: outside basis, then at-risk amount, then the passive-activity test. A loss that survives basis and at-risk is still passive by default for a limited partner and needs passive income to be released; with none available, nothing is currently deductible against salary or portfolio income.