On August 31 of the current tax year, the balance sheet of the RBD General Partn

Question

On August 31 of the current tax year, the balance sheet of the RBD General Partnership is as follows

On that date, Rachel sells her one-third partnership interest to Lisa for $300,000, consisting of cash and relief of Rachel’s share of the nonrecourse debt. The nonrecourse debt is shared equally among the partners. Rachel’s outside basis for her partnership interest is $250,000 (including her share of partnership debt). How much capital gain and/or ordinary income will Rachel recognize on the sale?

Adjusted Basis FMV Cash $150,000 $150,000 Receivables –0– 90,000 Capital assets 600,000 660,000 Total $750,000 $900,000 Nonrecourse debt $150,000 $150,000 Rachel, capital 200,000 250,000 Barry, capital 200,000 250,000 Dale, capital 200,000 250,000 Total $750,000 $900,000

Explanation / Answer

Rachel’s realized gain = $50,000 ($300,000 received less $250,000 outside basis).

As the receivables are a rule 751 “hot asset,” Rachel is treated as having sold her 1/3 share and, therefore, will recognize $30,000 ordinary income.

The rest of the sale is taxed under the general rule of 741 and generates a capital gain of $20,000.

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