Q: I have a partnership tax depreciation question. The accountant for a partnership that I used to be a partner (of) said I have to find my own tax adviser. I do my own return using purchased software. I tried to answer this question by searching the internet and posting a question on a website. I feel like this is a common thing and there must be an answer. I owned a 25% interest in a partnership that owned several rental properties. I left the partnership in May and received one of the rentals. The value of the property I got was agreed to be $375,000. The tax basis of my partnership interest was $134,834. The partnership accountant told me the property basis is $161,115 to the partnership. They used 27.5 years as a depreciation life and started depreciation in 2016. It appears that my tax basis will become $134,834 and not $375,000 or $161,115. Can you confirm this? I cannot find if I start depreciating the property in 2022 over 27.5 years or if I can start back in 2016 using the partnership’s acquisition date.
A: Many tax questions can be answered by an internet search. This is not one of them. The answer can only be found in the statutory tax law.
The answer is straightforward under the law. However, it may be a good idea for you to hire a good tax adviser for 2022 to make sure you get the depreciation schedule set up properly.
A good tax adviser can also check the facts and figures that you gave me to be sure they are correct. I’ll answer assuming that they are.
Along the way I will also give you citations to the law so either you, or someone you hire, can check the answer that I provided.
First, the distribution is not taxable to you or to the partnership. Section 731 says this. Section 732 says that the basis of the property to you becomes $134,834, which is the basis of your partnership interest.
Because the distribution was subject to Section 731, Section 168(i)(7) explains how you determined the life to use for depreciation.
You will use the same starting date as the partnership, that is, 2016. The life is 27.5 years starting on that earlier date.
The depreciation for 2022 will need to be split between you and the partnership. You will use mid-May as the acquisition date.
Your 2022 depreciation will include one-half of a month for May and seven full months for the remainder of the year. Therefore, you will claim 7.5/12 of the 2022 depreciation. The partnership claims 4.5/12 of a full year’s depreciation.
This, of course, assumes that you will use the property for business or investment use. I suspect that you know that but I did have to mention it.
You are correct that the tax basis of the property has declined from $161,115 to the partnership to $134,834 to you. This is because the basis to you is “substituted” from your partnership interest.
The continuing partners in this partnership may recover the “lost” $26,281 basis ($161,115 minus $134,834) if the partnership has, or makes in 2022, a Section 754 election. This is not your concern.
Had your partnership interest basis been, say, $175,000, the basis of the property would instead become $175,000, In such a case the “extra” basis would be a new asset.
This means that $161,115 would use a 2015 start date but the additional $13,885 basis would start depreciation in 2022.
Again, you may want to have a tax adviser dig a bit deeper into the facts to be sure there are no traps I could not identify from your stated facts.
I have assumed that the property was acquired by purchase and not by a contribution from one or more partners.
If the property was contributed by another partner, and had a fair value in excess of its tax basis, the contributing partner may be forced to recognize gain on this distribution.
I also assumed that you did not acquire your partnership interest by a contribution of property (not money). Unless it was the property distributed to you, the answer could also be different.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
