New regulations clarify partnership allocations related to contributed property.

• Author: Lux, Michael
• Position: Brief Article

Sec. 704(c) requires that unrealized appreciation or depreciation inherent in property contributed to a partnership eventually be allocated to the contributing partner. The IRS recently issued final regulations concerning such allocations.

Example: Partner A contributes land with a tax basis of $400 and a fair market value of $1,000 in exchange for a 50% interest in partnership AB; partner B contributes $1,000 in cash in exchange for his 50% interest. If AB sells the property for $1,200, the first $600 of "built-in gain" will all be allocated for tax purposes to A, who contributed the land. The allocation rules get considerably more complicated when depreciable property is contributed to AB, providing for special allocations of depreciation expense (with limitations) to the cash contributor in such situations.

The final rules, which contain some significant changes from the proposed regulations, provide significant flexibility and potential planning opportunities for taxpayers in selecting reasonable allocation methods. They provide for several different allocation methods:

* Traditional method.

* Traditional method with curative allocations.

* Remedial method (a revision of the deferred sale method originally included in the proposed regulations and now contained...