Investors & landlords

A few comments:

• The partnership world can become complicated very quickly, regardless of the size of the entity.
• From your initial facts, yours starts off complicated.  As such, I recommend you meet with a tax professional to get started in the right direction.  I would probably even go so far as to say you should have the tax professional prepare your tax return.
• What you are missing from the get go, is that technically you have two sets of books; regular books and then your Section 704(b) books.
• It is the Section 704(b) book piece that will make this complicated.  Your Section 704(b) book balance sheet begins with all members having the $1 mil beginning capital account.  This is because you gave member C a 1/3 interest when determining the value of the property contributed.
• Based on bullet 4, members A and B are expecting to get their share of depreciation based on the $1 mil but the economic basis based on your facts is only $303,000.  This is where a couple of other Code section come into play.
• As was noted, that is where code section 704(c) comes into play.  There are 3 possible methods available to handle the disparity between the $1 mil FMV (Section 704(b) book basis) and the book (inside basis) basis.  These methods determine how that disparity is handled each year with respect to allocating depreciation.
• The other code section that would come into play is one where if the property was sold, and the Section 704(c) disparity had not been eliminated, then any remaining built-in gain when contributed would be allocated first to member C.
• As you can see, this is not for the faint of heart and can lead to filing incorrect tax returns very quickly; meaning from year 1.