Julie owns property that is treated as a capital asset in her hands. She contributed a parcel of land (basis $60,000; fair market value $58,000) to a real estate partnership, which will hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property.

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The partnership will recognize a $2,000 capital loss ($58,000 - $56,000) on the sale of the property, not an ordinary loss. Julie's basis in the partnership will be reduced by her share of the partnership's loss. Additionally, since Julie contributed the land with a fair market value less than her basis, she will recognize a capital loss equal to the difference between her basis and the fair market value ($60,000 - $58,000 = $2,000). However, she will not be able to deduct this loss because it is considered a non-deductible personal loss.

Julie Owns Property That Is Treated as a Capital Asset