Question

1. The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2019, Jessica contributed land valued at $472,000 to the partnership in exchange for a 50% interest. She had purchased the land in 2011 for $330,400 and held it for investment purposes (capital asset). The partnership holds the land as inventory.

   On the same date, Matt contributed land valued at $472,000 that he had purchased in 2009 for $566,400. 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 $495,600. In 2021, the partnership sells the real estate contributed by Matt for $448,400.

   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 (gain/loss)  recognized on the sale of the land contributed by Jessica is $ , and the type is (ordinary income/capital gains/ordinary loss/ capital loss).

   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 (gain/loss) recognized on the sale of the land contributed by Matt is $ , and the type is (ordinary income/capital gains/ part capital gain part ordinary income/ordinary loss/capital loss/ part capital loss part ordinary loss).

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

   The amount of the (gain/loss) recognized on the sale of the land contributed by Matt is $ , and the type is  (ordinary income/capital gains/ part capital gain part ordinary income/ordinary loss/capital loss/ part capital loss part ordinary loss)..

Answer 1

A. The partners initial bases in their partnership interest are the same amounts as their bases in the contributed property

Jessica's basis - $330400

Matt's basis - $ 566400

B. In 2020 sale results in ordinary income $165200 to the partnership.

Selling price $495600

Basis (330400)

Gain $ 165200

C. In 2021 sale results in a capital loss of $ 94400 and ordinary loss of $23400

Selling price $448400

Basis (566400)

Loss $118000

As a sale of inventory (determine at parnership level)

The sale in 2021 of the land contributed by matt would normally result in a ordinary loss. However this overrides usual treatment . Character of pre contribution loss is detrmined based on the character of property in matt's hands. This sale was within the 5 years of capital contribution date . So the loss is capital in nature to the extent of the built in loss at the contribution date which is :

FMV at contribution $472000

Basis (566400)

Capital loss ($94400)

The remaining loss of $23600 in 2021 is ordinary loss. Because character of the post contribution loss is based on the partnerships ownership and use of the property as inventory.

D. It would all be ordinary loss.