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Special Enrollment Examination

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Part 2 Partnerships question: Jo contributed land with an adjusted basis

Part 2Partnerships

Jo contributed land with an adjusted basis of $30,000 and a fair market value of $50,000 to a partnership for a partnership interest. The land is not encumbered. What gain does Jo recognize?

A None, and her basis in the interest is $30,000
B $20,000, and her basis in the interest is $50,000
C $20,000, and her basis in the interest is $30,000
D None, and her basis in the interest is $50,000

Show the answer and explanation

Answer: A. None, and her basis in the interest is $30,000

Under section 721, no gain or loss is recognized on contributing property to a partnership in exchange for an interest. The partner's outside basis is the adjusted basis of the property contributed ($30,000), and the partnership takes the same $30,000 basis in the land. The built-in gain is allocated back to Jo under section 704(c) when recognized. Source: IRC 721(a), 722, 723; Pub. 541 (12-2025), Contribution of Property. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Using fair market value as the contributing partner's basis.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.