At the beginning of 2018, Ms. P purchased a 20 percent interest in PPY Partnersh

Question

At the beginning of 2018, Ms. P purchased a 20 percent interest in PPY Partnership for $24,000. Ms. P’s Schedule K-1 reported that her share of PPY’s debt at year-end was $27,000, and her share of ordinary loss was $46,200. On January 1, 2019, Ms. P sold her interest to another partner for $3,500 cash.

a. How much of her share of PPY’s loss can Ms. P deduct on her 2018 return?

b. Compute Ms. P’s recognized gain on sale of her PPY interest.

c. How would your answers to parts a and b change if PPY were an S corporation instead of a partnership?

Explanation / Answer

a) Ms. P initial cost basis in her partnership interest = $24000

Increased by share at year end = $27000

Decrease by share of ordinary loss = ($46200)

Adjusted basis = (24000 + 27000 – 46200) = $4800

So, the entire $46200 share of loss can be deducted on the year end return.

b) Amount realized on sale = debt relief + cash = $27000 + $3500 = $30500

Adjusted basis = $4800

So, the gain recognized on sale of partnership interest = $(30500-4800) = $ 25700

c) If the partnership was based on S corporation principle, then Ms P’s basis will not include the share of entity’s debt. So the adjusted basis on Jan 1, 2019 will be 0 and she would have $3500 gain on the sale of her S corporation stocks.

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