Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land (the land is inventory to the partnership). Paul will recognize:
a. $0 gain or loss.
b. $36,000 ordinary income.
c. $36,000 capital gain.
d. $60,000 ordinary income.
e. $60,000 capital gain.
d
RATIONALE: If a partner owns more than a 50% interest in a partnership, any property sold to the partnership at a gain results in ordinary income to the selling partner, unless the property was a capital asset both to the partner and the partnership. In this case, the land was a capital asset to Paul, but it was inventory to the partnership, so the gain is treated as ordinary income. The gain on the sale is $60,000 ($160,000 – $100,000); as this is a sale of Paul's asset, the entire gain is taxed to him.
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