
Another potential trap is any "built-in gain or loss" on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. Generally speaking, "built-in gain or loss" is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted. For example, an apartment complex purchased for $500,000 ten years ago has appreciated and now has a fair market value of $800,000. This requires allocating depreciation to the new partner based on his share the depreciable property using current fair market value at the time of admission. This reduces the amount of depreciation allocated to the existing partners and will require a special allocation of the “built-in gain or loss” when partnership assets are sold.
These are complex rules that may require the partnership adopt special accounting procedures and tracking. Before admitting a new partner, review the proposed transaction with a qualified tax professional and take the appropriate measures to minimize the immediate tax consequences to existing partners.
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