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In this video, 4.02 – Partnership Taxation: Basis – Lesson 2, Roger Philipp, CPA, CGMA, builds off of Lesson 1 and presents concrete examples demonstrating how a partner’s basis is affected by initial contribution to the partnership and liabilities assumed by the partnership. Not sure why an equal partner in a brand-new partnership of three contributing property with a tax basis of 11, a fair value of 15, and a mortgage of 6 would end up with an outside basis of 7? You will understand once you view Roger’s masterful explanation. The most important concept in partnership tax law is that of a partner’s basis, which refers to the amount the partner has at risk in the partnership. While working through the examples, Roger provides a helpful schematic for calculating ending outside basis, starting from beginning outside basis or initial contribution and analyzing the basis for the effects of partnership income or loss, contributions to the partnership, distributions from the partnership, the partner’s share of partnership liabilities, and liabilities contributed by the partner to the partnership. It is important to understand that a partner’s basis is not identical with the partner’s equity or capital in the partnership. The main or sometimes only difference between a partner’s basis and the partner’s capital account is the partner’s percentage share of the partnership’s liabilities. Connect with us: Website: https://accounting.uworld.com/cpa-rev... Blog: https://accounting.uworld.com/blog/cp... Twitter: / uworldrogercpa Facebook: / uworldrogercpareview Instagram: / uworldrogercpareview Pinterest: / uworldrogercpareview LinkedIn: / uworld-roger-cpa-review Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://accounting.uworld.com/cpa-rev... Video Transcript Sneak Peek: Let's look at this for example in your notes. For example. It says, for example. Assume that ABC partnership is formed with three equal partners, A, B, and C. A and B each contribute $100 cash. C contributes land with a tax basis of 80 and a fair value of 130. Subject to an unpaid mortgage of 30 that is being assumed by the partnership. Alright so what we're doing is we have these three partners, so we're trying to see what's happening as far as at risk. Now actually before I do this example, let's take one thing out of the mix because I want to make it a little bit easier for you. Let's say. Let's come over here. Let's say we're going to form a partnership. So here's the partnership. And we're going to have A, boom, B, boom, C, boom. We each put in a dollar, a dollar, a dollar. Now is three dollars enough to run the partnership? I don't think so. So we're going to go to the bank and we're going to borrow $90,000,000. Alright now is it enough? $90,000,003, yes. Alright let's just say we borrowed 90 bucks. So we borrowed 90 bucks. Now with the $90, we're each at risk for one third of this, right? So $90 over, that's 30 bucks each. So if you come back over here, here's our initial contribution. Remember we put in cash for a dollar. But we are at risk for my percent of the partnership debt is 30. My basis is 31. Why? Because I'm at risk for 31 bucks. I'm at risk-- I can lose the dollar I put in, my basis, plus the at risk is 30. Now in reality, I'm liable for up to all 90. If the other two go bankrupt, I'm unlimitedly liable. But assuming they're still there, you're a third, you're a third, I'm the other third. We're each at risk for 30 30 30. So that's what? So each of our basis, bases would be 31. Does that make sense? Okay so that makes sense. That's my percent of the contributed liability. Notice as they have more debt, my basis goes up. If we pay off this debt, bye bye. Now my basis goes down back to one. So when the debt goes down, my basis goes down. But remember that at risk part doesn't affect my capital, but it affects my basis. Okay now let's throw in this thing about the assumed mortgage. So what this one is saying is that let's say we are going to assume a mortgage. So let's say for example, and in this case, umm, well let's just do one person and then we'll do this example. Because I don't want to do all three people yet, let's just do one. So let's say that I am going to join the partnership and I have an asset with a basis of 11. And it has a fair market value of 15. And it's subject to a mortgage of $6. And there's three partners, each of us are a third, a third, a third. Okay. So we've got the basis is the property I'm contributing is 11, fair value's 15, mortgage is six and so on.