Question

The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2019, Jessica contributed land valued at $600,000 to the partnership, in exchange for a 50% interest in JM. She had purchased the land in 2011 for $420,000 and held it for investment purposes (capital asset). The partnership holds the land as inventory.

On the same date, Matt contributed land valued at $600,000 that he had purchased in 2009 for $720,000. He also became a 50% owner. Matt is a real estate developer, but this land was held personally for investment purposes. The partnership holds this land as inventory.

In 2020, the partnership sells the land contributed by Jessica for $620,000. In 2021, the partnership sells the real estate contributed by Matt for $580,000.

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

Jessica's initial basis is $420000. Matt's initial basis is $720000.

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  recognized on the sale of the land contributed by Jessica is $200000, and the type is ordinary income .

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 loss  recognized on the sale of the land contributed by Matt is $____________, and the type is part capital loss and part ordinary loss .

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

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

Answer 1

Please find all answers with proper explanation:

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

The partners’ initial bases in their partnership interests are the same amounts as their bases in the contributed property (§ 722).Jessica’s basis $420,000 and Matt’s basis 720000$

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 recognized on the sale of the land contributed by Jessica is $200000 to the partnership (Selling price $6,20,000- Basis $4,20,000), and the type is ordinary income, because the land is held as inventory by the partnership.

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 loss recognized on the sale of the land contributed by Matt is $ (140,000)(Selling price $ 5,80,000 – Basis $ 7,20,000) , and the type is (1,20,000) being capital loss and (20,000) being ordinary loss .

As a sale of inventory (determined at the partnership level), the sale of the land contributed by Matt would normally result in an ordinary loss. However, § 724 overrides the usual treatment. The character of the pre contribution loss, instead, is determined based on the character of the property in Matt’s hands. This sale was within five years of the capital contribution date, so the loss is capital in nature to the extent of the built-in loss at the contribution date, which is Capital loss($120,000) (Contribution $600,000-Basis $720,000). The remaining $20,000 loss is an ordinary (§ 1231) loss because the character of the post-contribution loss is based on the partnership’s ownership and use of the property as inventory.

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

The amount of the loss  recognized on the sale of the land contributed by Matt is ($ 140000), and the type is ordinary loss . This sale of land is after five years of capital contribution date, so this loss become ordinary loss. (Please refer Part C explanation for better understanding and comparison)

I hope this answer will help you and give conceptual clarity.

Good luck.

Thank You.