Ii the selling partners amount realized includes the

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II. The selling partner's amount realized includes the buyer's assumption of the selling partner's share of the partnership liabilities. Example Miller sold her partnership interest to Carter for $150,000 cash, plus Carter's assumption of Miller's $60,000 share of partnership liabilities. The amount realized by Miller on the sale of her partnership interest is $150,000 + $60,000 = $210,000. Hot Assets If the partnership has hot assets at the time a partnership interest is sold, the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income. Hot assets are a) unrealized receivables (receivables of a cash basis taxpayer; includes depreciation recapture), and b) inventory. Inventory : All assets other than cash, capital assets, and Section 1231 assets. The remaining sale proceeds are allocable to the selling partner's capital asset interest and result in a capital gain or loss. Example X has a 40% interest in the XY Partnership. Partner X sells his 40% interest to Z for $ 50,000. X's basis in his partnership is $22,000 , and the cash-method partnership had the following receivables and inventory: Adjusted Basis Fair Market Value Accounts receivable 0 $10,000 Inventory 4,000 10,000 Potential Section 1250 recapture 0 10,000 $4,000 $30,000 X's total gain is $28,000 (i.e., $50,000 – $22,000). Since the Section 1250 recapture is treated as “unrealized receivables” and the inventory is appreciated, X will recognize ordinary income to the extent that his selling price attributable to Section 751 items ($30,000 × 40% = $12,000) exceeds his basis in those items ($4,000 × 40% = $1,600), that is , $10,400. The remainder of X's gain ($28,000 – $10,400 = $17,600) will be treated as capital gain. In addition to hot assets, if the partnership owns collectibles or has Section 1250 assets, these items may also impact the gain from the sale of a partnership asset. The selling partners gain will be taxed at 28% to the extent it is due to collectibles, and any unrecaptured Section 1250 gain will be taxed at 25%.
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If a Section 754 election is in effect, then basis adjustments to partnership property may be needed. These basis adjustments benefit the new partner who purchased the partnership interest. Upon the sale or exchange of a partnership interest , the basis of partnership property to the transferee (not other partners) will be Increased by the excess of the basis of the transferee's partnership interest over the transferee's share of the adjusted basis of partnership property; or Decreased by the excess of transferee's share of adjusted basis of partnership property over the basis for the transferee's partnership interest. Example Assume X sells his 40% interest to Z for $80,000 when the partnership balance sheet reflects the following: Z will have a basis for his partnership interest of $80,000, while his share of the adjusted basis of partnership property will be only $12,000. If the partnership elects to adjust the basis of partnership property, it will increase the basis of its assets by $68,000 ($80,000 – $12,000) solely for the benefit of Z.
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  • Spring '17
  • Wendy Achiles
  • partner

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