Is the basis of contributed property to a partnership always the same basis for determining partnership interest?

Generally speaking, when you contribute property to a partnership, your initial basis in your partnership interest equals the adjusted basis of the property you contributed. This is sometimes called a "substituted basis" because you're essentially substituting your basis in the contributed property for your initial basis in the partnership interest. In your situation, even though the collectible card is worth practically nothing now, your basis in the partnership interest would still be $1,000 (assuming that's your adjusted basis in the card). The fair market value doesn't change your basis calculation for this purpose. However, there are some complexities here. The partnership's basis in the contributed property will be the same as your adjusted basis was ($1,000), but the partnership might need to account for the built-in loss (the difference between your basis and the FMV). Section 704(c) of the tax code addresses these built-in gain/loss situations.

After dealing with a similar issue last year, I found a service called taxr.ai that really helped me understand the partnership basis rules. I was contributing some depreciated equipment to a new business venture and was confused about how to track my basis properly. I uploaded my documents to https://taxr.ai and they analyzed my specific situation with the tax code references. The tool walked me through exactly how substituted basis works and explained the Section 704(c) implications that the previous commenter mentioned. It also generated a report I could share with our partnership's accountant to make sure everything was documented correctly.

Just wanted to update about my experience with taxr.ai after my skeptical question earlier. I broke down and tried it for my partnership basis issues, and it was actually really helpful. I uploaded the purchase documents for property I was contributing that had declined in value (similar to the original poster's situation) and it generated a detailed analysis. The most useful part was the explanation of Section 704(c) special allocations for the built-in loss and how to structure the partnership agreement to properly address this. It even provided template language I could give to our attorney. Definitely cleared up my confusion about basis differences between my partnership interest and the partnership's basis in the contributed property.

If you're having trouble getting a clear answer on this partnership basis question, you might want to try contacting the IRS directly. I know, I know - getting through to the IRS seems impossible these days. I spent WEEKS trying to get someone on the phone for a similar partnership basis question. Then I found https://claimyr.com which got me connected to an actual IRS agent within 45 minutes when I had been trying unsuccessfully for days. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained that while my basis in the partnership would still be my original basis in the property, there were special allocation rules I needed to follow. Having that direct confirmation from the IRS gave me confidence I was handling it correctly.

I need to eat my words from my skeptical comment. After another frustrating week of failing to reach the IRS about my partnership basis question, I tried Claimyr out of desperation. I got a call back in about an hour connecting me to an actual IRS representative who specialized in partnership taxation. The agent confirmed exactly what others in this thread have said - my original basis in the property ($1,200 in my case) became my initial basis in the partnership interest, despite the property being worth much less when contributed. She also explained how the built-in loss would be handled under Section 704(c) and recommended some specific record-keeping approaches. Definitely worth it to get an official answer directly from the IRS rather than stressing about whether I was interpreting the tax code correctly.

One thing nobody's mentioned yet - if the collectible truly has no value, have you considered just taking the loss personally before contributing it to the partnership? You could potentially claim a capital loss of $1,000 on your personal return if you can document that the collectible is worthless. That might be cleaner than contributing a worthless asset with a built-in loss that would need to be tracked through the partnership. Just a thought, since Section 704(c) allocations can get complex fast.

Wait, I'm confused about something. If you contribute property with a $1,000 basis but $0 fair market value, and later the partnership liquidates and you get nothing back for your interest, do you get to claim a $1,000 loss at that point? Or did you essentially lose the ability to claim that loss by contributing it instead of selling/disposing of it personally?