GIFT of Partnership interest with negative basis

[michaelmars]

partners basis is negative 500,000 fmv is 2,000,000. [a building] Partner gifts partnership share to his kid.

I know the gift is based on the 2 mil. and i think the donor has to pick up a 500k gain but not sure. I don't think the negative basis gets transfered to the donee. Anyone know?

[kcjenkins]

Property Received as a Gift

To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property.

Dad is clearly going to need to pay gift tax on the gift.

For the partnership adjustments, the best guidance I know is the audit guide. http://www.irs.gov/businesses/partnerships/article/0,,id=134696,00.html

[SaraEA]

A partner's basis can never go below zero. The capital account can, but not basis. A gift tax return is in order. The federal unified estate/gift tax exemption will apply, so likely no federal gift tax will be due. The state may be another story.

[michaelmars]

I am not concerned about the gift tax portion. My question is, does the donor have a taxable gain to get the basis to -0- or does the donee keep the negative basis?

[jainen]

>>does the donee keep the negative basis?<<

According to Pub 541, "The partner's basis is decreased (but never below zero) by... "

Perhaps you are confusing capital account (share of partnership equity) with basis (partner's investment). This error is so common we often make it deliberately when applying at-risk limitations in trivial amounts. In my opinion, half a million is not trivial and suggests that losses have been improperly claimed.

A negative capital account sometimes means taxable relief of liability on disposition. Since this transfer would be a gift, recipient would have a dual basis depending on eventual gain/loss, as described in Pub 551.

[kcjenkins]

If a partner’s capital account is negative at the beginning of the year and has a balance of zero at the end of the year, the partner may have left the partnership without satisfying his/her share of partnership liabilities. If so, the departing partner may have received a deemed cash distribution under IRC section 752( b )

Transfers among family members identified as gifts may trigger sale or exchange treatment for the donor to the extent a decrease in the donor’s share of partnership liabilities is treated as a deemed cash distribution. Rev. Rul. 84-53 illustrates basis allocations and adjustments that may occur when a partner owns multiple interests in a partnership and disposes of only a portion of such interests.

Gift of a Partnership Interest

A gift of a partnership interest is usually a family affair. IRC section 704(e)(3) provides that the purchase of a partnership interest in a family partnership by one member of a family from another shall be considered to be created by a gift from the seller. IRC section 704(e)(2) addresses the allocation of distributive share where the partnership interest is created by gift. Of course, the gift of a partnership interest to a family member can be other than an interest in a family partnership.

The gift of a partnership interest may have a tax impact on the donor. The following factors should be considered when determining whether an issue is present:

• Whether the partnership interest transferred was properly valued;
  
• Whether the adjusted basis of the partnership interest was correctly stated;
  
• Whether allocation of the distributive share of partnership items between the donor and donee was correctly computed;
  
• Whether the transfer resulted in debt relief to the donor;
  
• Whether debt relief results in a deemed sale of a partnership interest;
  
• Whether the allowance of suspended passive activity losses was correctly computed;
  
• Whether there is a gift tax return requirement and a gift tax liability
  

The gift of a partnership interest free of liabilities (that is, has no share of partnership liabilities under IRC section 752) is not subject to income tax. If the partnership interest is encumbered by debt, or the donor partner shares in partnership liabilities pursuant to IRC section 752, there is potentially a taxable event.

Gift of a Partnership Interest Unencumbered by Debt

The basis of the gift of a partnership interest in the hands of the donee when the partnership interest is not encumbered by debt is generally determined as follows:

• For purposes of determining future gain, the donee’s takes a carryover adjusted basis from the donor.
  
• For the purpose of determining future loss, the donee’s takes a carryover adjusted basis from the donor, except that if the donor’s adjusted basis was greater than the fair market value of the property at the time of the gift, the basis to the donee is limited to the fair market value at the time of the gift.
  

Effect on Passive Losses

The gift of a partnership interest with accumulated suspended passive activity losses will not trigger an allowance of the losses to the donor or donee. See IRC section 469(j)(6)( b ). The suspended passive activity losses are instead added to the donor’s adjusted basis in his/her partnership interest immediately before the transfer. This step up in basis carries over to the donee under the general rules of IRC section 1015. See IRC section 469(j)(6)(A). The step-up is to the donor’s outside basis in the partnership under IRC section 705, rather than the partnership’s inside basis in its assets. Any tax benefits to the donee are deferred until such time as the partnership interest is disposed of in a taxable transaction.

Moreover, the step-up in the donor’s outside basis has limits. If the addition to the donee’s basis resulting from unused passive losses exceeds the fair market value of the partnership interest at the time of the gift, and the donee subsequently disposes of the interest in a taxable transaction resulting in a loss, the donee’s basis is limited to the fair market value at the time of the gift.

[michaelmars]

Ok i am still confused. In real estate its common for the capital account to be negative since distributions often exceed income due to depreciation and refi's. Property mortgage's count towards basis in allowing the capital to be negative. In this case the capital account is negative 500k. So what is the donee's opening capital and basis.

[jainen]

>>mortgage's count towards basis in allowing the capital to be negative<<

I'm confused too. Are you saying this is a "gift" of no equity whatsoever but a half million dollars of debt?

[OldJack]

tried to get rid of the smiley, that automatically replaced the b in the () but it would not let me.. Sorry about that.

Put a space before and after the "b" and not smiley.

Thanks, Jack, I was putting a space before but not after the b.

KC

[mm9811]

To KC,

The link you gave doesn't work. What document where you referring to?

To OP.

What is the loan amount on the building?

[jklcpa]

KC may have been trying to give a link to this IRS audit guide as it contains the text she quoted in the earlier posts: http://www.irs.gov/Businesses/Partnerships/Partnership---Audit-Technique-Guide---Chapter-7---Dispositions-of-Partnership-Interest-(Rev.-3-2008)

It does sound like this partner has a deemed distribution because he has been relieved of his share of the partnership debt. Also, you should read the section about assets that have the characteristics of being both cold and hot assets since this building has been depreciated, you should check whether or not there is a component of ordinary income from recapture to this transaction.

I was starting to post that you should also check whether you have a technical termination or not so that you don't miss filing a return for a short year, but then I ran across this article that says transfers by gift don't trigger a technical termination with the cite of Regs. Sec. 1.708-1( b )(2). http://www.aicpa.org/Publications/TaxAdviser/2012/October/Pages/clinic-story-10.aspx It's not anything you asked about, but since I had the article up, I thought I'd post it since it does address the gift issue.