Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000 and an adjusted basis of $30,000 and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest? A) $37,500. B) $40,000. C) $42,500. D) $45,000.

Brett's outside tax basis in his LLC interest is $45000

Explanation:

A partner outside tax basis consist of basis of contributed property, partnership debt allocated to the partner without any debt relief. Non recourse debt that is more than basis of contributed property must be given to the partner that contributed to the property.

Brett's outside tax basis in his LLC interest = Cash contribution + basis of building - debt of building + Non recourse loan + non recourse mortgage + remaining mortgage on building

Cash contribution = $5000

Basis of building = $30000

Debt of building = $35000

Non recourse loan = Profit sharing ratio × Non recourse loan = 50% × $50000 = $25000

non recourse mortgage = $5000

remaining mortgage on building  = 50% × $30000 = $15000

Brett's outside tax basis in his LLC interest = $5000 + $30000 - $35000 + $25000 + $5000 + $150000 = $45000