Question

Krypton Partnership owns and operates an office building in the medical district of a large city. The property was contributed to the partnership several years ago by partner K. Under the terms of the partnership agreement, K is allocated 20% of the partnership’s profits, gains, losses and deductions, other than depreciation. Depreciation is allocated 50% to K and 50% to the other partners. The office building is encumbered by a nonrecourse mortgage of $750,000. Its tax basis is $650,000 and its book value is $875,000.

Under the general rules governing the allocation of partnership nonrecourse liabilities, how much of the nonrecourse liability will be allocated to K?

Answer 1

Under IRC Section 752 and its regulations, partnership liabilities are divided into two Categories :

a- Recourse Liabilities ( partnership liabilities for which a partner bears the Economic Risk of Loss, where a partner is obliged to make payment to the Creditor

b- Non recourse Liabilities where no partner bears the Economic Risk of Loss

Non Recourse Liabilities of K will be allocated based on sharing of allocation of partnership gains, losses, profits - which is 20% equivalent to $130,000 less 50% of the depreciation expenses( since K is allocated 50% ) because depreciation is treated as non recourse deduction.