A partner’s initial basis in his partnership interest depends on how the partner acquired the interest.
If the partner acquired the interest in exchange for a contribution to the partnership, his basis generally equals the amount of money and the partner’s adjusted basis in any property contributed to the partnership. If the property is subject to indebtedness at the time of the contribution, the partner’s basis is reduced by the portion of the debt that is assumed by the other partners. If the partner acquired his interest in exchange for services, his basis equals the value of services provided. If the partner purchased his partnership interest, his basis equals his cost. The partner’s initial basis is adjusted to give effect to transactions affecting the partnership.
His remaining ,000 of basis in his LLC interest becomes his basis in the distributed real property (Sec. Z does not recognize any gain on the distribution although the FMV of the property R receives (,000) exceeds its ,000 Example 2.They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor.A change in reporting position will be treated for federal tax purposes as a conversion of the entity.This discussion of the tax consequences of contributions to partnerships will also apply to limited liability companies unless the limited liability company has elected to be taxed as a corporation.As with S corporations, the tax consequences of a distribution to a partner are heavily dependent on the partner’s basis in his partnership interest.Unlike the rules that apply to C corporations, which tax income both at the entity and at the owner level, the partnership rules are designed to only tax income once, at the owner level.