Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business and will build residential housing (for sale to customers) on the land (the land is inventory to the partnership). Paul will recognize:
A) $0 gain or loss.
B) $36,000 ordinary income.
C) $36,000 capital gain.
D) $60,000 ordinary income.
E) $60,000 capital gain.

Question

Quizplus · Accepted Answer

Paul will recognize a $60,000 ordinary income because the sale is to a partnership in which he has more than a 50% interest, making it a related party transaction. The land is considered inventory to the partnership, so the gain is treated as ordinary income.

Paul Sells One Parcel of Land (Basis of $100,000) for Its