Kenya sells her 20% partnership interest having a $28,000 basis to Ebony for $40,000 cash. At the time of the sale, the partnership has no liabilities and its assets are as follows: Kenya and Ebony have no agreement concerning the allocation of the sales price. Ordinary income recognized by Kenya as a result of the sale is

Question

Kenya sells her 20% partnership interest having a $28,000 basis to Ebony for $40,000 cash. At the time of the sale, the partnership has no liabilities and its assets are as follows:  Kenya and Ebony have no agreement concerning the allocation of the sales price. Ordinary income recognized by Kenya as a result of the sale is

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Kenya recognized a gain of $12,000 on the sale of her 20% partnership interest. To determine this gain, we need to first calculate her adjusted basis in her partnership interest. Her basis of $28,000 is increased by her share of the partnership's income, which is $10,000 ($50,000 x 20%), and decreased by her share of the partnership's losses, which is $8,000 ($40,000 x 20%). Her adjusted basis is therefore $30,000 ($28,000 + $10,000 - $8,000).

Next, we need to determine the amount realized from the sale. Kenya received $40,000 in cash for her partnership interest.

Finally, we compare the amount realized to Kenya's adjusted basis to determine her gain. Kenya's gain is $10,000 ($40,000 - $30,000).

Since Kenya had no agreement with Ebony concerning the allocation of the sales price, we must assume that Kenya's share of the partnership's assets was proportionate to her share of the partnership interest. Therefore, Kenya's share of the partnership's assets was 20% of the total assets, or $120,000 x 20% = $24,000.

Kenya's gain of $10,000 must be allocated between her share of the partnership's ordinary income and her share of the Section 1231 gain. Since there is no Section 1231 gain, the entire gain is ordinary income. Therefore, Kenya's recognized ordinary income from the sale of her partnership interest is $10,000.

However, since Kenya's basis in her partnership interest was $30,000 and she sold it for $40,000, $16,000 ($30,000 - $40,000) of the gain should actually be considered a capital gain. However, since there was no Section 1231 gain, the entire $16,000 will be treated as an ordinary gain. Therefore, Kenya's recognized ordinary income from the sale of her partnership interest is $10,000 + $6,000 = $14,000.

Kenya Sells Her 20% Partnership Interest Having a $28,000 Basis