Greg & Haley form the Nashua LLC with equal ownership. Greg contributes $80,000
ID: 2467424 • Letter: G
Question
Greg & Haley form the Nashua LLC with equal ownership. Greg contributes $80,000 cash and Haley contributes land with an adjusted basis of $90,000 and a fair market value of $80,000.
a. How much gain or loss, if any, does Haley realize on the transfer? Does Haley recognize any gain or loss?
b. What is Greg's basis in his LLC interest?
c. What is Haley's basis in her LLC interest?
d. What is the LLCs basis in the property transferred by Haley?
e. Would there be a more effective way to structure the partnerhip formation?
Explanation / Answer
Solution.
As per the provisions of 26 U.S. Code § 721 "No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership."
Further The LLC steps into the shoes of the contributing member with respect to the holding period and adjusted tax basis of the contributed property (Secs. 1223 and 723).
Thus with reference to above the following are the solutions for given questions:
a. Haley does not realize any gain or loss on the transfer.
b. Greg's basis in his LLC interest shall be $45000. (90000*50%)
c. Haley's basis in his LLC interest shall be $45000. (90000*50%)
d. LLC's basis in the property transferred by Haley would be $90000.
e. Since in the given case the FMV of property is lesser than its basis, capital loss would arise on its tranfer. Now when land has been transferred to LLC such loss would be borne by LLC only. This way tax saving would occur for LLC and Greg would be benefitted equally as Haley. So from this point of view this method of formation is appropriately effective.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.