Nick sells his 25% interest in the LMNO Partnership to new partner Katrina for $67,500. The partnership's assets consist of cash ($100,000), land (basis of $90,000, fair market value of $110,000), and inventory (basis of $40,000, fair market value of $60,000). Nick's basis in his partnership interest was $57,500. On the sale, Nick will recognize ordinary income of $5,000 and a capital gain of $5,000.

Question

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Nick's basis in his partnership interest was $57,500. He sold his interest for $67,500, so he recognized a gain of $10,000. The partnership's assets have a fair market value of $270,000, so Nick's 25% interest is worth $67,500. Therefore, Nick's gain is ordinary income to the extent of his basis in his partnership interest, which is $5,000. The remaining gain of $5,000 is capital gain.

Nick Sells His 25% Interest in the LMNO Partnership to New