Nick sells his 25% interest in the LMNO Partnership to new partner Nancy for $50,000.The partnership's assets consist of cash ($100,000),land (basis of $60,000;fair market value of $40,000),and inventory (basis of $50,000;fair market value of $60,000).Nick's basis in his partnership interest was $52,500.On the sale,Nick will recognize ordinary income of $2,500 and a capital loss of $5,000.

Question

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Nick's basis in his partnership interest was $52,500, but he only received $50,000 from the sale. Therefore, he will recognize a capital loss of $2,500. Additionally, he will recognize ordinary income of $2,500, which is the difference between his basis and the amount he received for the sale. The sale of a partnership interest is generally treated as a sale of a capital asset, so the capital loss of $5,000 is also correct.

Nick Sells His 25% Interest in the LMNO Partnership to New