Question

1.

Problem 10-35 (Algorithmic) (LO. 3, 9)

The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2019, Jessica contributed land valued at $888,000 to the partnership in exchange for a 50% interest. She had purchased the land in 2011 for $621,600 and held it for investment purposes (capital asset). The partnership holds the land as inventory.

On the same date, Matt contributed land valued at $888,000 that he had purchased in 2009 for $1,065,600. He became a 50% owner. Matt is a real estate developer, but he held this land personally for investment purposes. The partnership holds this land as inventory.

In 2020, the partnership sells the land contributed by Jessica for $932,400. In 2021, the partnership sells the real estate contributed by Matt for $843,600.

a. What is each partner's initial basis in his or her partnership interest?

Jessica's initial basis is $............?. Matt's initial basis is $..............?

b. What is the amount of gain or loss recognized on the sale of the land contributed by Jessica? What is the character of this gain or loss?

The amount of the.................? recognized on the sale of the land contributed by Jessica is $,................? and the type is ...................?.

c. What is the amount of gain or loss recognized on the sale of the land contributed by Matt? What is the character of this gain or loss?

The amount of the ...........? recognized on the sale of the land contributed by Matt is $............?, and the type is........? .

d. How would your answer in (c) change if the property was sold in 2026?

The amount of the..........? recognized on the sale of the land contributed by Matt is $.............?, and the type is ...................?.

Answer 1

Solution:-

a)

Type	Jessica contribution in $	Matt contribution in $
Initial Basis	$ 621,600	$1,065,600

b)

The amount of gain or loss recognized on the sale of the land contributed by Jessica

Selling price
	$ 932,400.00
Basis
	$                         621,600.00
Gain/ loss
Gain	$ 310,800.00

This gain is ordinary income, because land was inventory of partnership. Land was capital asset for Jessica.

c) The amount of gain or loss recognized on the sale of the land contributed by Matt

Selling price
	$                         843,600.00
Basis
	$                     1,065,600.00
Gain/ loss
Loss	$                      (222,000.00)

This loss can be break down in 177,600 is capital loss and 44,400 is ordinary loss. This sale is within 5 years of date of capital contribution of asset so the loss is capital up to the extent of build in loss at the contribution date

i.e. 1,065,600-888,000 =177,600 and remaining is ordinary loss.

d)

If property sold after 5 years of capital contribution then total loss will considered as ordinary loss,
hence if such sale was placed in 2026 then the whole loss of $222,000 considered as ordinary loss because after 5 years loss would be loss on sale of inventory of partnership asset.

and the type is Loss