[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.722-1]

[Page 500-501]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.722-1  Basis of contributing partner's interest.

    The basis to a partner of a partnership interest acquired by a 
contribution of property, including money, to the partnership shall be 
the amount of money contributed plus the adjusted basis at the time of 
contribution of any property contributed. If the acquisition of an 
interest in partnership capital results in taxable income to a partner, 
such income shall constitute an addition to the basis of the partner's 
interest. See paragraph (b) of Sec. 1.721-1. If the contributed 
property is subject to indebtedness or if liabilities of the partner are 
assumed by the partnership, the basis of the contributing partner's 
interest shall be reduced by the portion of the indebtedness assumed by 
the other partners, since the partnership's assumption of his 
indebtedness is treated as a distribution of money to the partner. 
Conversely, the assumption by the other partners of a portion of the 
contributor's indebtedness is treated as a contribution of money by 
them. See section 752 and Sec. 1.752-1. The provisions of this section 
may be illustrated by the following examples:

    Example 1. A acquired a 20-percent interest in a partnership by 
contributing property. At the time of A's contribution, the property had 
a fair market value of $10,000, an adjusted basis to A of $4,000, and 
was subject to a mortgage of $2,000. Payment of the mortgage was assumed 
by the partnership. The basis of A's interest in the partnership is 
$2,400, computed as follows:

Adjusted basis to A of property contributed.................      $4,000
Less portion of mortgage assumed by other partners which           1,600
 must be treated as a distribution (80 percent of $2,000)...
                                                             -----------
    Basis of A's interest...................................       2,400


    Example 2. If, in example 1 of this section, the property 
contributed by A was subject to a mortgage of $6,000, the basis of A's 
interest would be zero, computed as follows:

[[Page 501]]



Adjusted basis to A of property contributed.................      $4,000
Less portion of mortgage assumed by other partners which           4,800
 must be treated as a distribution (80 percent of $6,000)...
                                                             -----------
                                                                   (800)



Since A's basis cannot be less than zero, the $800 in excess of basis, 
which is considered as a distribution of money under section 752(b), is 
treated as capital gain from the sale or exchange or a partnership 
interest. See section 731(a).