Smith Properties is a real estate partnership that focuses on the acquisition and management of commercial and residential real estate in the Southwestern United States. Edna Zapata has been a partner in the partnership for the past 15 years.

This year, she decided to sell her partnership interest and focus on other interests. The partnership has the following balance sheets as of the date she sold her interest:

Edna owned a one-third interest in partnership capital and profits. As such, the fair market value of her interest in the partnership was $1,800,000. However, the partnership has a reputation for wise investment and management of properties.
The buyer of Edna’s interest in the partnership was willing to pay a premium for this expertise. Thus, Edna sold her interest in the partnership for $2,000,000.
The buyer also assumed responsibility for Edna’s one-third share of the partnership's liabilities. The partnership has a Section 754 election in effect. Determine the amount of the partnership’s basis adjustment under Section 743(b), and allocate this adjustment among the partnership's assets. Assume that all of the partnership’s real estate properties are business-use assets which will generate capital gain upon disposition under Code Section 1231. Explain how the excess of the purchase price over the fair market value of the partnership’s tangible assets will affect the partnership's post-adjustment balance sheet.

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Cash and equivalents Real estate portfolio (includes multiple properties) Other tangible assets Total Assets Liabilities (principally mortgage liabilities on the partnership's real estate portfolio) Partner capital Total liabilities & capital Tax Basis $250,000 2,400,000 500,000 $3,150,000 Tax Basis $1,350,000 FMV $250,000 6,000,000 500,000 $6,750,000 FMV $1,350,000 1,800,000 5,400,000 $3,150,000 $6,750,000