Brian is a 25% partner in the BC Partnership. On January 1, BC distributes $20,000 cash and land with a $16,000 fair value (inside basis $8,000) to Brian. BC has no liabilities at the date of the distribution. Brian's basis in BC is $16,000. What is the amount and character of Brian's gain or loss on the distribution?

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The amount of the distribution is $20,000 + $16,000 = $36,000. Brian receives 25% of that, or $9,000. Since his basis in BC is $16,000 and he received cash and property worth $9,000, he has a realized loss of $7,000 ($16,000 - $9,000). However, since the land has a fair market value greater than its inside basis, there is built-in gain of $8,000 ($16,000 - $8,000). This built-in gain is allocated to Brian as his share of partnership gain, and is treated as a long-term capital gain. So Brian has a $8,000 long-term capital gain minus his $7,000 loss, resulting in a net capital gain of $1,000.

Brian Is a 25% Partner in the BC Partnership