The contributions to a partnership in exchange for a partnership interest do not result in tax. The payment of cash for a partnership interest is simply purchasing an asset – not a taxable event. The contribution of property to a partnership in return for a partnership interest also is not generally a taxable event; however, there can be recognition of income on the contribution of encumbered property to a partnership.

The general non-recognition rule does not cover the contribution of services to a partnership in exchange for a partnership capital interest. The value of a capital interest in a partnership that is transferred to a partner in exchange for his services is taxable to him as ordinary income if the interest is not subject to a substantial risk of forfeiture. The receipt of a profits interest (as opposed to a capital interest) in exchange for services is generally not taxable as ordinary income.

The general non-recognition rule does not cover disguised sales or exchanges of property. The IRS may also recast the dealings of partners and partnerships if there has been an abuse of the partnership rules.

Other considerations affecting future taxation arise from a transaction in exchange for a partnership interest. For example, upon the contribution of property to a partnership in exchange for a partnership interest, the partnership receives a basis in its newly acquired property, the partner receives a basis in the partnership interest, and the capital accounts of the partners must be adjusted to reflect the transaction. If the contributed property is depreciable, the effect of the contribution on the depreciation must be addressed. Consideration must also be given to the character of the property contributed and to the length of time it has been held.

Please contact our office at your earliest convenience to make an appointment so we may discuss your individual situation and evaluate the tax consequences of the options available to you.