Mr.and Ms.Smith's partnership owns the following assets: * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Mr)and Ms.Smith each have a basis for their partnership interest of $135,000.Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.
A)$230,000 ordinary income.
B)$230,000 capital gain.
C)$115,000 ordinary income and $115,000 capital gain.
D)$110,000 ordinary income and $120,000 capital gain.
E)None of the above.

Question

Mr.and Ms.Smith's partnership owns the following assets:  * Potential § 1245 recapture of $45,000.
** Straight-line depreciation was used.
Mr)and Ms.Smith each have a basis for their partnership interest of $135,000.Calculate their combined recognized gain or loss and classify it as capital or ordinary if they sell their partnership interests for $500,000.
A)$230,000 ordinary income. 
B)$230,000 capital gain. 
C)$115,000 ordinary income and $115,000 capital gain. 
D)$110,000 ordinary income and $120,000 capital gain. 
E)None of the above.

Quizplus · Accepted Answer

To calculate the recognized gain or loss upon selling a partnership interest, we first need to calculate the basis in the partnership interest, which is the sum of the partner's initial investment, any additional contributions, and their share of partnership income and losses.

In this case, each partner has a basis of $135,000, for a total basis of $270,000.

Next, we need to calculate the amount realized upon selling the partnership interest. The total amount realized is $500,000.

To calculate the recognized gain or loss, we need to subtract the basis from the amount realized.

$500,000 - $270,000 = $230,000

Since the partnership owns assets subject to potential § 1245 recapture, any gain recognized on the sale of the partnership interest would be considered ordinary income. Therefore, the recognized gain of $230,000 would be classified as $110,000 ordinary income and $120,000 capital gain, making answer choice D the correct answer.

MrAnd MsSmith's Partnership Owns the Following Assets: * Potential §