Wilbur had an adjusted basis in his partnership interest of $35,000 when the par

Question

Wilbur had an adjusted basis in his partnership interest of $35,000 when the partnership made a distribution to him, not in complete termination of his interest, of $30,000 cash and a parcel of real estate which the partnership held as an investment. The real estate had an adjusted basis to the partnership of $10,000 and a fair market value of $15,000. As a result of this distribution:

a. Wilbur has ordinary income of $30,000, a capital gain of $15,000, and the real estate has a basis to him of $15,000.

b. Wilbur has ordinary income of $5,000, no capital gain and the real estate has a basis to him of $10,000.

c. Wilbur has no ordinary income, no capital gain, and the real estate has a basis to him of $5,000.

d. Wilbur has no ordinary income, a capital gain of $5,000, and the real estate has a basis of $10,000.

e. Wilbur has no ordinary income, a capital gain of $10,000, and the real estate has a basis of $15,000.

Explanation / Answer

The answer is c.

Wilbur does not have an ordinary income: This is because the cash distributed is 30,000 less than his basis in the partnership interest = 35,000

Wilbur does not have a capital gain: The capital gain will be realized by Wilbur only on sale of the property and there is no capital gain on distribution.

Wilbur has a real estate basis of $5,000: The basis of the patrner in the property is same as the basis of partnership in the property. However this cannot be more than the partner's basis in partnership interest less the amount of cash distributed to him.

So, even the basis of property to the firm is $10,000, this amount cannot exceed (35,000-30,000) = $ 5,000.

Thus real estate has a basis of $5,000 to Wilbur

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