How to Calculate Gain on Sale of Land in a Partnership

How can we calculate the gain on the sale of land in a partnership?

At the formation of Berry Partnership, Straw contributes land with a basis of $190,000 and a fair market value of $570,000, and Rasp contributes cash of $570,000. Straw and Rasp share profits and losses equally. When the land is sold two years later for $950,000, Straw must recognize a gain of how much?

Calculation of Gain on Sale of Land in a Partnership

When the land contributed by Straw is sold for $950,000, they will need to recognize a gain on the sale. To calculate this gain, we need to determine the adjusted basis of the land at the time of the sale. To calculate the adjusted basis of the land, we start with the initial basis of $190,000 and then make adjustments for any increases or decreases in value.

In this case, we know that the fair market value of the land at the time of contribution was $570,000, so we can increase the basis to that amount. Straw's adjusted basis in the land is therefore $570,000. When the land is sold for $950,000, the gain is calculated as the sale price minus the adjusted basis: $950,000 - $570,000 = $380,000.

So, the gain that Straw must recognize on the sale of the land is $380,000. This gain will be split equally between Straw and Rasp, as they share profits and losses equally in the partnership.

Calculating gains on the sale of assets in a partnership is important to determine the financial impact on the partners. In the case of land contributed to a partnership, understanding the adjusted basis of the asset is crucial for accurately determining the gain on the sale.

By following the steps outlined above, partners in a partnership can calculate the gain on the sale of land contributed by one of the partners. This information enables partners to make informed financial decisions and understand the implications of asset sales within the partnership agreement.

Calculating gains on the sale of assets in a partnership involves determining the adjusted basis of the asset and subtracting it from the sale price to arrive at the gain. Partners in a partnership share profits and losses according to the terms of their agreement, which influences how gains from asset sales are distributed among the partners.