Shauna is a 50 percent partner in the SH Partnership. Shauna sells one-half of her interest to Kara for $60,000 cash. Just before the sale, Shauna's basis in her entire partnership interest is $150,000, including her $60,000 share of the partnership liabilities. SH's assets on the sale date are as follows: What is the amount and character of Shauna's gain or loss on the sale?

Question

Shauna is a 50 percent partner in the SH Partnership. Shauna sells one-half of her interest to Kara for $60,000 cash. Just before the sale, Shauna's basis in her entire partnership interest is $150,000, including her $60,000 share of the partnership liabilities. SH's assets on the sale date are as follows:  What is the amount and character of Shauna's gain or loss on the sale?

Quizplus · Accepted Answer

To determine Shauna's gain or loss on the sale, we need to calculate the amount realized and her adjusted basis in the partnership interest.

Amount realized = $60,000 (cash received from sale)
Adjusted basis in partnership interest = $150,000 / 2 = $75,000 (since Shauna sold half her interest)

Therefore, Shauna's realized gain is $60,000 - $75,000 = ($15,000).

Since Shauna's basis includes her share of partnership liabilities, we need to determine how the liabilities are allocated between Shauna's remaining partnership interest and the interest she sold to Kara. Based on the partnership's assets and liabilities, it appears that Shauna's share of the partnership liabilities is primarily attributed to accounts payable and current liabilities, whereas the partnership's long-term liabilities are related to mortgages and bank loans in excess of the partnership's assets. Therefore, we can assume that the liabilities allocated to Shauna's remaining partnership interest and the interest she sold to Kara are proportional to their shares of assets.

Shauna's remaining partnership interest is 50%, so her share of partnership liabilities is also 50% of the $110,000 total liabilities, or $55,000. The liabilities allocated to the interest sold to Kara are $110,000 - $55,000 = $55,000.

Therefore, Shauna's adjusted basis in the interest sold to Kara is $75,000 / 2 = $37,500 (since she sold half her interest), and her adjusted basis in her remaining partnership interest is $75,000 - $55,000 = $20,000.

Since Shauna's realized gain is a capital loss, she can offset it against any capital gains she has for the year. However, since she sold her partnership interest for less than her adjusted basis, she is also entitled to a deduction for the loss against ordinary income, up to a maximum of $3,000 per year. In this case, her ordinary income deduction would be $15,000 - $3,000 = $12,000, so her total tax consequences are a $15,000 ordinary income deduction and a $15,000 capital loss.

Shauna Is a 50 Percent Partner in the SH Partnership