Figures: tax year 2026
A contribution of noncash property generally produces no recognized gain or loss when exchanged for a partnership interest. The Internal Revenue Code permits this treatment without a minimum ownership percentage. Services are not property for this rule, and an investment-company contribution can fall outside ordinary nonrecognition.
The records serve different purposes:
To calculate tax implications, the preparer records adjusted tax basis and fair market value separately at contribution. Built-in gain is precontribution appreciation; built-in loss is the excess of adjusted basis over contribution-date value. Neither difference disappears merely because the contribution qualifies for nonrecognition.
A contribution of noncash property preserves precontribution gain or loss for the contributor when tax items arise. Subsequent economic changes follow the partnership's valid allocation arrangement. Depreciation differences can require special allocations during ownership, before an eventual sale.
Property contributed at a depreciated value retains its carryover inside basis and generally supplies that same initial outside basis. For allocations to other partners, however, the property's basis is treated as its contribution-date value.
Common mistakes
- Fair value substituted for basis. In Example 2, reducing Nora's outside basis to $60,000 improperly discards $20,000 of preserved tax investment.
- Recourse debt allocated by profits. In Example 7, reproduces the staff error; the enforceable allocation is $40,000.
- Guaranteed payment deducted twice. Subtracting Jordan's payment from the correct basis gives , an unsupported additional basis reduction.
Bottom line
- Property contributions generally preserve tax basis and defer gain or loss, while precontribution differences remain attributable to the contributor.
- Outside basis, inside basis and capital accounts measure different interests and require separate records.
- Liability increases generally add outside basis; net liability relief can create taxable gain when it exceeds available basis.
- Guaranteed payments create ordinary income, with partnership deduction or capitalization determined by the payment's purpose and applicable timing rules.
Exam shortcut
First label the transaction: contribution, compensation, distribution or interest sale. When a property transfer and payment are linked, resolve sale treatment before starting a distribution schedule. Build a liability column from guarantees, release terms and reimbursement rights. Do not infer the seller's relief from the buyer's post-closing allocation. For property distributions, mark money, remaining outside basis and assigned property basis in that order. Give marketable securities a separate gain-test calculation.
The full lesson (about 6,959 words, 46 min read) adds 9 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.D1
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