Paul sells one parcel of land (basis of $200,000) for its fair market value of $250,000 to a partnership in which he owns a 75% capital interest. Paul held the land for investment purposes. The partnership is in the real estate development business, and will build residential housing (for sale to customers) on the land. Paul will recognize:
A) $0 gain or loss.
B) $37,500 ordinary income.
C) $37,500 capital gain.
D) $50,000 ordinary income.
E) $50,000 capital gain.

Question

Quizplus · Accepted Answer

Paul will recognize $50,000 ordinary income because the sale to a partnership in which he owns more than a 50% interest is treated as a sale to a related party, and gains from sales to related parties are treated as ordinary income.

Paul Sells One Parcel of Land (Basis of $200,000) for Its