§ 1.722-1 Basis of contributing partner's interest.
The basis to a partner of a partnership interest acquired by a
contribution of property, including money, to the partnership shall
be the amount of money contributed plus the adjusted basis at the
time of contribution of any property contributed. If the
acquisition of an interest in partnership capital results in
taxable income to a partner, such income shall constitute an
addition to the basis of the partner's interest. See paragraph (b)
of § 1.721-1. If the contributed property is subject to
indebtedness or if liabilities of the partner are assumed by the
partnership, the basis of the contributing partner's interest shall
be reduced by the portion of the indebtedness assumed by the other
partners, since the partnership's assumption of his indebtedness is
treated as a distribution of money to the partner. Conversely, the
assumption by the other partners of a portion of the contributor's
indebtedness is treated as a contribution of money by them. See
section 752 and § 1.752-1. See § 1.460-4(k)(3)(iv)(A) for rules
relating to basis adjustments required where a contract accounted
for under a long-term contract method of accounting is transferred
in a contribution to which section 721(a) applies. The provisions
of this section may be illustrated by the following examples:
Example 1.A acquired a 20-percent interest in a partnership by
contributing property. At the time of A's contribution, the
property had a fair market value of $10,000, an adjusted basis to A
of $4,000, and was subject to a mortgage of $2,000. Payment of the
mortgage was assumed by the partnership. The basis of A's interest
in the partnership is $2,400, computed as follows:
Adjusted basis to
A of property contributed
$4,000
Less portion of
mortgage assumed by other partners which must be treated as a
distribution (80 percent of $2,000)
1,600
Basis of A's
interest
2,400
Example 2.If, in example 1 of this section, the property
contributed by A was subject to a mortgage of $6,000, the basis of
A's interest would be zero, computed as follows:
Adjusted basis to
A of property contributed
$4,000
Less portion of
mortgage assumed by other partners which must be treated as a
distribution (80 percent of $6,000)
4,800
(800)
Since A's basis cannot be less than zero, the $800 in excess of
basis, which is considered as a distribution of money under section
752(b), is treated as capital gain from the sale or exchange or a
partnership interest. See section 731(a). [T.D. 6500, 25 FR 11814,
Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 9137,
69 FR 42558, July 16, 2004]