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. Compute Paulina's gain or loss on the sale of her partnership interest.

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Paulina's basis in her partnership interest is $25,000 (the amount she paid for it). Her share of the partnership's debt is $10,000, which increases her basis to $35,000. Her share of the partnership's 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).

At the Beginning of Year 1, Paulina Purchased a 25