Property distribution tax question?

Question

I have a partnership with 3 people. Ownership is 50, 40, 10. Bought land for 100k 10 years ago. Now worth 200k. I want to distribute the land to the partners(50% to one partner 50% to the other partner, and the other partner(10%owner partner) doesn't want the land, only cash). How is this transaction handled? And what are the relevant tax issues?

The property was bought by the partnership 10 years ago, it is a nonliquidating partnership... There is no actual sale price, just transfering ownership to partners individually instead of ownership by partnership entity.

Also, what are the journal entries to record this transaction. Thanks

Answer 1

Is this a liquidating or nonliquidating distribution? Was the land purchased inside the partnership? Or purchased by one of the partners ten years ago and contibuted to the partnership in the ten years since purchase?

Sorry but we really need more information to give relevant tax issues advice.

Edit:

OK - so a nonliquidating (or operating) distribution - Partnership continues to exist with exact same owners and percentages after distribution as before the distribution.

You absolutely do not want a disproportionate contribution because things can get a little ugly under IRC section 751 with that so my recommendation would be distribute based on partnership percentages. This can be done in two ways - distribute land in 50, 40, 10 amount and have 40% partner buy 10% partners share or distribute cash and land to even up percentages.

Let's start with the all land distribution - You will show land removed from books (credit land) for $100,000 the opposite side will be debits to A (50%, B (40%) and C's(10%) capital accounts for $50,000, $40,000 and $10,000. Each of the partners will reduce their outside basis by that amount (50k, 40k or 10k) and that will be their basis in the parcel of land they own. (CAUTION: If any of these partners has an outside basis less than the land distributed they will, as someone said earlier, have a taxable event and will need to pay capital gains on the excess distribution!!) Now C sells his land to B for the 10k basis and has no taxable event and B's basis in the land becomes $50k (the same as A's) - (Another CAUTION: If B has intentions to sell the land shortly the portion purchased from C is now SHORT-TERM and will result in ordinary income!). You say that the land is valued at $200k so the "deferred" tax will be picked up when each of these partner's sells their land and has to pick-up capital gain.

Now the second option: you will make the total distribution to the three partner's 120k. A's distribution will be 60% of the land - book value $60k, 50% of distributions; B's distribution will be 40% of land and $8k cash - book value $48k, 40% of distributions; C's distribution will be $12k cash - book value $12k, 10% of distributions. Once again everyone will reduce their outside basis by the distribution amount and once again there will be no taxable event as long as the distributions DO NOT exceed outside basis. Your journal entry will be a credit to land for $100k; a credit to cash for $12k; a debit to A's partner capital account for $60k; a debit to B's partner capital account for $48k and a debit to C's partner capital account for $12k. A and B will have deferred gain on the land that will become a taxable event when they sell the land for a gain.

Hopefully this covers it - if you have more questions - add details and I'm sure I (or one of the other tax professionals here) can clarify. (Also if you are set on keeping the land a 50/50 split just say that and I can give you the journal entry)

Answer 2

The 40% partner could buy out the 10% partner first. The 10% partner would have a gain on the sale. You would then distribute the land and pay income tax when the land is sold. The 40% partner would have an increase in his tax basis because of having bought out the 10% partner

Answer 3

You didn't say that your selling the land so how are you going to pay out the cash?
If only distributing ownership then this only increases the basis of the partners' share of their investment into the partnership. It doesn't seem taxable.
If you pay out the cash it seems it would reduce that partner's basis.
I believe a partners basis gets reported on the partnership tax return but a redistribution of ownership doesn't seem taxable unless the land is sold.

Answer 4

Please don't listen to marty.

A distribution of property from a partnership to a partner will not result in a partner recognizing taxable income. All that will occur is that the partner's tax basis in his/her interest in the partnership will now become his/her tax basis in the property that was distributed. The partner that receives cash, on the other hand, might have an issue because if he/she receives a cash distribution that is in excess of his/her tax basis in the partnership, the excess will be taxed as a long-term capital gain.