Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $46,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $4,200 and a building he bought as a storefront for the motorcycles. The building has an FMV of $41,000 and an adjusted basis of $26,000 and is secured by a $31,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest

$42,000

Explanation:

Computation of Brett's outside tax basis in his LLC interest.

Contributing partner's outside basis can be seen as a basis which is consists of the amount of the basis of the contributed property minus any debt relief plus any of the partnership debt which was allocated to the partner.

Therefore When there are allocatingn of the nonrecourse debt which was been secured by the contributed property, this means that any nonrecourse debt that tend to exceeds the basis of the contributed property must be effectively allocated to the partner alone that contributed to the property.

Therefore Any remaining nonrecourse debt will be allocated according to the partners' profit sharing ratios which is :

Cash+ $ Basis of building− debt on building+ (50% profit sharing ratio × nonrecourse bank nonrecourse mortgage less basis of contributed property + (50% × remaining mortgage on building) = Total tax basis

[$4,200+ $26,000

=$30,000−$31,000

=$1,000

Hence,

$1,000 + $23,000 +$5,000 + $13,000

Outside tax basis =$42,000

Therefore Brett's outside tax basis in his LLC interest would be $42,000

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