Question

Ed contributes land which he held for four years as an investment to the EFGH Partnership on March 1, 2018, in exchange for a 20% interest in the partnership. At the time Ed contributed the property, it had a fair market value of $60,000 and an adjusted basis to Ed of $95,000. EFGH is a real estate developer and holds the land as inventory.
(1)   If the partnership sells the land Ed contributed for $52,000 on July 1, 2019, how much, and what type(s), of gain or loss are recognized?

(2)   Assume the same facts as above except that the fair market value of the land on March 1, 2018, was $110,000 and it is sold for $120,000 on July 1, 2019. How much, and what type(s) of gain or loss are recognized?

(3)   Assume the same facts as above, except that the fair market value of the land is $110,000 on March 1, 2018, and that the land is distributed in September 2019, to one of the other partners when its FMV is $140,000. How much gain, if any, must Ed recognize and what effect does it have on his outside basis?

(4)   Assume that Ed held the land as inventory and the partnership holds the land as an investment. If the land had a basis of $60,000 and a fair market value of $110,000 when Ed contributed it on March 1, 2018, how much, and what type(s), of gain or loss are recognized if the partnership sells the land for $125,000 on July 1, 2019?

Answer 1

Part 1 answer

There is a $43,000 loss ($95,000 - $52,000). The $35,000 loss that accrued while Ed held the asset retains its character and is a capital loss. The remaining $8,000 of loss is an ordinary loss, as the land was part of the partnership's inventory.

Part 2 answer

There is a $25,000 Profit ($120000 - $95,000). The $15,000 profit that accrued while Ed held the asset retains its character and is a capital Profit. The remaining $10,000 of gain is an ordinary Profit, as the land was part of the partnership's inventory.

Part 3 Answer

Ed will recognised Gain of $ 15000 as capital Profit.

Part 4 Answer

There is a $65,000 Profit ($125000 - $60,000). The $50,000 profit that accrued while Ed held the asset retains its character and is a Ordinary Profit. The remaining $15,000 of gain is an Capital Profit, as the land was part of the partnership's investment.