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

The recognized gain or loss is calculated as the selling price minus the adjusted basis. In this case, the selling price is $500,000 and the adjusted basis is $270,000 ($135,000 each for Mr. and Ms. Smith). Therefore, the recognized gain is $230,000.

Since there is a potential recapture of $45,000, this amount is classified as ordinary income. The remaining gain of $185,000 is classified as capital gain. Therefore, the answer is $110,000 ordinary income and $120,000 capital gain.

Mr.and Ms.Smith's Partnership Owns the Following Assets