At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.
A) $3,000 loss
B) $8,000 loss
C) $2,000 gain
D) $0 gain or loss

Question

Quizplus · Accepted Answer

Paulina's basis in her partnership interest is $25,000 (the amount she paid for it). Her share of partnership debt is $10,000, which increases her basis to $35,000. Her share of ordinary loss is $5,000, which decreases her basis to $30,000. When she sells her interest for $22,000, she realizes a loss of $8,000 ($30,000 - $22,000). However, because she is a general partner, she is personally liable for the partnership's debts. Therefore, she must also take into account her share of the partnership's debt when calculating her gain or loss on the sale of her interest. Her share of the partnership's debt is $10,000, which reduces her loss to $2,000 ($8,000 - $10,000).

At the Beginning of Year 1, Paulina Purchased a 25