Question

Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During 2016, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry’s gain or loss on this transaction?

Answer 1

Barry realizes a $40,000 gain, which is classified as ordinary income from the sale of the rental property to the partnership, assuming no special tax rules alter this result.

Step-by-step explanation:

When Barry sells a rental property with a basis of $60,000 to B&B Interests, a partnership in which he has a 50 percent interest, for $100,000, the transaction results in a gain.

Since the partnership is holding the rental as inventory for resale, the nature of the gain is ordinary income. The amount of Barry's gain is the difference between the selling price ($100,000) and his basis ($60,000), which equals $40,000.

However, special tax rules may apply since this transaction involves a sale between a partnership and a partner owning a substantial interest in the partnership.