If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property by the partner to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership.

Question

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This is known as the "related party rule" and is outlined in Section 707(a)(2)(B) of the Internal Revenue Code. It applies when a partner sells property to the partnership in which they have a majority interest, and the property is not a capital asset of the partnership. In this case, any resulting gain will be treated as ordinary income to the partner rather than a capital gain.

If a Partner Has a More Than 50 Percent Interest