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 calculation of the recognized gain or loss is as follows:
Sales Price: $500,000
Basis (2 x $135,000): $270,000
Gain: $230,000
Of the recognized gain of $230,000, $45,000 is ordinary income due to the potential § 1245 recapture. The remaining $185,000 is a capital gain. Therefore, the answer is D.

Mr and Ms Smith's Partnership Owns the Following Assets: * Potential