- Amy acquired a 20-percent interest in a partnership by contributing property.

- At the time of Amys contribution, the property had a fair market value of $10,000, an adjusted basis to Amy of $4,000, and was subject to a mortgage of $6,000.

- Payment of the mortgage was assumed by the partnership.

Task: Compute As interest in the partnership. Please answer in the IRAC format (Issue, Rule, Application and Conclusion).

When the interest basis in the partnership is negative, what is the approach? I got to this point:

Issue: Basis of Contributing Partner's Interest with Liabilities Assumed

Rule: All partnership debt is allocated among the partners and included in the partners bases. Partnership debt includes any partnership obligation that creates an asset; results in an expense to the partnership; or results in a nondeductible, noncapitalizable item at the partnership level. This definition includes certain contingent liabilities. The definition also includes most debt that is considered a liability under financial accounting rules. However, partnership debt does not include accounts payable of a cash basis partnership.

An increase in a partners share of partnership debt is treated as a cash contribution by the partner to the partnership and increases the partners basis. A decrease in a partners share of partnership debt is treated as a cash distribution from the partnership to the partner and decreases the partners basis.

Application:

Property FMV = $10,000 / Basis = $4,000 / Subject to Mortgage of $6,000

Amy's basis in partnership interest

Adjusted basis of property contributed 4,000

Mortgage Assumed by other partners ($6,000 X 80%) (4,800)

Amy's basis in partnership interest (800)

Conclusion: ????? Tip: The answer is not -800