Beth sells her 25% partnership interest to Katie for $50,000 cash on July 1 of the current tax year.Katie also assumed Beth's share of the partnership's liabilities.Beth's basis in her partnership interest at the beginning of the year was $40,000, including a $15,000 share of partnership liabilities.The partnership's income for the entire year was $100,000, and Beth's share of partnership debt was $10,000 as of the date she sold the partnership interest.Assume the partnership has no hot assets and that its income is earned evenly throughout the year.Beth recognizes a gain of $12,500 on the sale.

Question

Quizplus · Accepted Answer

Beth's gain on the sale is calculated as follows:

Amount realized = $50,000 (cash received) 
Adjusted basis = $40,000 (beginning-of-year basis) + $15,000 (share of partnership liabilities) - $10,000 (Beth's share of partnership debt) = $45,000 
Gain = Amount realized - Adjusted basis = $50,000 - $45,000 = $5,000 
However, because Beth owned her partnership interest for more than one year, the gain is treated as long-term. Therefore, the gain is equal to 25% of the partnership's income for the entire year, or $25,000. 
Since Beth is only realizing $5,000 on the sale, she recognizes a gain of $12,500 ($5,000 actual gain + $7,500 deemed gain).

Beth Sells Her 25% Partnership Interest to Katie for $50,000