Home Accountant The tax base is questioned for the former partner

The tax base is questioned for the former partner


Q: I have a question about tax depreciation for partnerships. The accountant of a partnership of which I was a partner told me that I had to find my own tax adviser. I do my own feedback using purchased software. I tried to answer this question by searching the internet and posting a question on a website. I feel like this is a common thing and there must be an answer. I had a 25% interest in a partnership that owned several rental properties. I left the partnership in May and received one of the rentals. The value of the property I got was agreed at $375,000. The tax base of my interest in the partnership was $134,834. The partnership accountant told me that the ownership base is $161,115 for the partnership. They used 27.5 years as the depreciation period and started depreciation in 2016. It looks like my tax base will become $134,834 and not $375,000 or $161,115. Can you confirm it? I can’t find if I start depreciating the property in 2022 over 27.5 years or if I can start again in 2016 using the date of acquisition of the partnership.

A: Many tax questions can be answered by searching the Internet. It’s not one of them. The answer can only be found in statutory tax law.

The answer is simple under the law. However, it may be a good idea for you to hire a good tax advisor for 2022 to ensure that the amortization schedule is set up correctly.

A good tax advisor can also check the facts and figures you have provided to me to ensure that they are correct. I will answer assuming they are.

Along the way, I will also give you citations to the law so that you, or someone you hire, can verify the answer I provided.

First, the distribution is not taxable to you or the partnership. Section 731 says this. Section 732 states that the base of ownership for you becomes $134,834, which is the base of your interest in the partnership.

Since the distribution was subject to section 731, section 168(i)(7) explains how you determined the useful life to use for depreciation.

You will use the same start date as the partnership, i.e. 2016. The lifespan is 27.5 years from this earlier date.

Depreciation for 2022 will need to be shared between you and the partnership. You will use mid-May as the acquisition date.

Your 2022 amortization will include half a month for May and seven full months for the rest of the year. Therefore, you will claim 7.5/12 of the 2022 depreciation. The partnership claims 4.5/12 of a full year’s depreciation.

This, of course, assumes that you will be using the property for commercial or investment purposes. I suspect you know this, but I had to mention it.

You are correct that the property tax base has gone from $161,115 for the partnership to $134,834 for you. This is because the basis for you is “substituted” for your partnership interest.

The continuing partners of this partnership can recover the “lost” base of $26,281 ($161,115 minus $134,834) if the partnership has, or makes in 2022, a section 754 election. This is not not your concern.

If your partnership interest base had been, say, $175,000, the ownership base would instead have become $175,000. In such a case, the “additional” base would be a new asset.

This means that $161,115 would use a start date of 2015, but the additional base of $13,885 would start amortization in 2022.

Again, you may want to have a tax advisor dig into the facts a bit to make sure there are no pitfalls that I couldn’t identify from the facts you’ve stated.

I assumed that the property had been acquired by purchase and not by contribution from one or more partners.

If the asset was contributed by another partner and had a fair value greater than its tax base, the contributing partner may be forced to recognize a gain on this distribution.

I also assumed that you did not acquire your interest in the company by contributing property (not money). Unless it’s the property that was distributed to you, the answer could also be different.

Jim Hamill is the Tax Practice Manager at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]