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?

Question

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Latesha's basis in her one-third interest in Dana Associates is $8,666.67 ($26,000 ÷ 3). When the partnership is liquidated, Latesha is considered to receive a distribution of partnership assets in proportion to her interest. Latesha receives $20,000 cash, which is equal to her one-third share of the cash. Her one-third share of the inventory has an FMV of $13,333.33 ($40,000 ÷ 3), but since the inventory has declined in value from its basis of $15,333.33 ($46,000 ÷ 3), Latesha's share of the loss is $2,000 ($15,333.33 - $13,333.33). Latesha's $24,000 basis is greater than her share of the liquidation ($20,000 cash + $13,333.33 inventory loss = $33,333.33), so she has a recognized capital loss of $4,000 ($24,000 - $20,000).

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