Now let’s do the same kind of question again.

But let’s look at all three partners to see how it affects their basis. So let’s go back

to that for example. For example assume that ABC partnership is formed with three equal

partners, A, B, and C. A and B contribute $100 cash. C contributes land with a tax basis

of 80, fair value of 130, subject to and unpaid mortgage of 30 that is being assumed by the

partnership. Okay so what we need to do is figure out what

their basis is. So let’s come over here. Let’s set this up again. We’ve got partner A, partner

B, partner C. He’s got $100 cash, $100 cash. This guy puts in property. They told us that

the property has a fair market value of 130. Now remember fair market value 130. Carry

over basis or adjusted basis or tax basis of 80.

Now why do they give you the fair market value number? To ruin your career, so you pick it.

Forget about it, forget about it. We’re each one third partners and this is subject to

a mortgage of $6. Okay, so initially boom. Carry over basis, 80. Contributed mortgage.

I’m contributing a mortgage of how much? The mortgage on this is… Where’d I get $6?

Let’s try that again. Unpaid mortgage of 30 is being assumed. Okay I’m mixing questions.

30 bucks. So I’m really putting in an asset here of 80, but I still owe 30 on it. I should

probably get credit for 50, but I’m at risk for a third of this. So coming over here.

Contributed liability. I’m putting in this mortgage of 30, but we’re each at risk for

a third which is plus ten, plus ten, plus ten. Do you see how it affects everybody?

So everybody’s basis goes up because we’re all at risk for a third of that new debt.

So he ends up with what? 110. He ends up with 110. I end up with 80 minus 30 is 50 plus

ten is 60. So 110, 110, and 60. That would be your ending numbers which you’ll see there

in that box. Mmm, okay. What about services? Now remember when I contribute

cash. Cash not subject to a mortgage. But property, they love that. So you can see how

there’s two things. And what are the two things? We’ll come back over again. The two things

being plus my percent of the liability. Minus the contributed liability. So contributed

liability, my third of it, boom. That increases my basis. That didn’t exist in an S Corp.

It does exist with the partnership. And then looking over services. When a partner

renders services in exchange for an interest, the partner reports ordinary income equal

to the fair value of the partnership interest that is being granted, and the partner’s basis

increased by that amount. So whether it’s, again, services or whether it is the asset.

So next item. Under no circumstances can a partner’s basis ever be reduced below zero.

So it doesn’t go zero. It cannot go negative. It says if a loss would’ve reduced the partner’s

base below zero, that portion of the loss is not deductible. If a distribution would’ve

reduced it below zero, the partner will either adjust the basis of the distributed asset,

or in the case of cash, report a gain. Because if you get money, but you have a zero basis,

you must’ve had a gain. So basis never– These are the bullet points,

the key points. Basis never declines below zero. Loss reducing basis below zero is not

deductible. If you get cash distribution exceeding it, it’s a gain. Contributed assets subject

to higher liability results in a gain. I’m going to show you this example now. And they

like to test this one too. One more time. Contributed asset. Let’s say

that this asset I owe more. The basis is 11, but I owe 12. Is that what that bullet said?

Contributed assets subject to a higher liability. Contributed asset subject to a higher liability

results what? In a gain. Let’s do this example in the notes. It says

example. We get a 20 percent. Let me just write this down. And uh… Okay we put…

It says we get a 20 percent interest by contributing an asset with a fair value of 10, a carry-over

basis of four, subject to a mortgage of six which the partnership assumes. One more time,

we get a 20 percent interest contributing an asset of 10, fair value. Carry over basis

four, subject to a mortgage of six. So let’s put these numbers on the board and

see what we’ve got. Stuff’s pretty fun isn’t it? I know I’m having a great time. Alright.

We have fair market value, even though you’re all saying to yourselves pfft, forget about

it. Fair market value is 10. We have a carry-over basis of four, subject to a mortgage of six.

And we’re getting 20 percent. Let me make sure I got these numbers right. 20 percent,

10,000, four, subject to a mortgage of six. Okay so. Coming over here, we’re going to

first contribute the asset. Remember, doesn’t matter about the 80 percent rule. You’re contributing

cash, you’re contributing property, carry over basis, carry over holding period. So

I’m contributing carry over 4,000. Subject to a mortgage of 6,000. I’m going to get 20

percent of that which is 1,200 plus 1,200. So I’ve got four plus 12 is 58, minus six

equals 800 negative. Can your basis ever go negative? No. So it

stops at zero, therefore I have an $800 gain. Why do I have a gain? Because I should have

a negative basis. Instead I have a zero basis, therefore the rest was a gain. That’s why

it said if you contribute cash, if you contribute property cash, that would be that gain. So

it results in a gain, results in a gain. You’ll see that in your notes. Since basis cannot

be negative, have a gain of 800 and a basis of zero. So that’s important to understand.

Gain, basis of zero. So again, that’s kind of how we’re looking

at it. That is how we’re dealing with the basis. That is how we’re dealing with the

contributed assets. That’s where we have those two additional things in your operation, the

flow. Your percent of the partnership liabilities is a plus, contributed liabilities is a minus.

Alright in a minute, we’re going to continue on with that, and overlook, again, at the

operation again.