Question

The SSC Partnership balance sheet includes the following assets on December 31 of the current year:

Basis FMV
Cash $180,000 $180,000
Accounts receivable -0- 60,000
Land 90,000 120,000

Total $270,000 $360,000

Susan, a 1/3 partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

a. $10,000 ordinary income; $20,000 capital gain.
b. $30,000 capital gain.
c. $30,000 ordinary income.
d. $10,000 capital gain; $20,000 ordinary income.

Answer 1

Susan must recognize a $10,000 capital gain and a $20,000 ordinary income from the sale of her partnership interest.

Step-by-step explanation:

To determine the capital gain and ordinary income Susan must recognize from the sale, we need to calculate the adjusted basis of her partnership interest and the cash received from the sale. Susan's adjusted basis is $90,000 and she sold her partnership interest for $120,000 cash, which results in a gain of $30,000 ($120,000 - $90,000). However, since Susan's share of the partnership's land has appreciated, she must recognize the ordinary income equal to the difference between her share of the appreciation in land and her share of the partnership's land (1/3 x ($120,000 - $90,000)) which is $10,000. Therefore, the answer is option d. $10,000 capital gain; $20,000 ordinary income.