7744 / What are the rules for allocation of a partnership’s income, gains, losses, deductions, and credits if a partner contributes property to the partnership?

If a partner contributes property to a partnership, allocations of income, gain, loss, and deduction must generally be made to the partner to reflect any variation between the basis of the property to the partnership and its fair market value at the time of contribution.¹ When contributed property is distributed to a partner other than the contributing partner, the contributing partner will recognize gain or loss upon such distribution if it occurs within seven years of the contribution.² However, a contributing partner is treated as receiving property which he or she contributed (and no gain or loss will therefore be recognized on the distribution) if the property contributed is distributed to another partner and like-kind property is distributed to the contributing partner within the earlier of (1) 180 days after the distribution to the other partner, or (2) the partner’s tax return due date (including extensions) for the year in which the distribution to the other partner occurs.³

For contributions of property made after October 22, 2004, if the property has a built-in loss, the loss is considered only in determining the items allocated to the contributing partner. Also, when determining items allocated to other partners, the basis of the property is considered its fair market value when it was contributed to the partnership.⁴

1. IRC § 704(c)(1)(A).