Ten years ago, Latesha acquired a one-third interest in Dana Associates, a partnership, for $26,000 cash. This year, Latesha's entire interest in the partnership is liquidated when her basis is $24,000. Dana's assets consist of the following: cash, $20,000; inventory with a basis of $46,000 and an FMV of $40,000. Dana has no liabilities. Latesha receives the cash of $20,000 in liquidation of her entire interest. What is Latesha's recognized loss on the liquidation of her interest in Dana?
A)$0
B)$4,000 long-term capital loss
C)$4,000 short-term capital loss and $2,000 ordinary loss
D)$4,000 long-term capital loss and $2,000 ordinary loss

Question

Quizplus · Accepted Answer

Latesha's recognized loss is calculated based on the difference between her basis in the partnership ($24,000) and the amount she received in liquidation ($20,000), which equals a $4,000 loss. Since her interest in the partnership is considered a capital asset and she held it for more than one year (ten years, as stated), the loss is classified as a long-term capital loss. There's no ordinary loss because the loss is entirely on the liquidation of her partnership interest, not on specific assets within the partnership.

Ten Years Ago, Latesha Acquired a One-Third Interest in Dana