Question

Paul sells one parcel of land (basis of $100,000) for its fair market value of $160,000 to a partnership in which he owns a 60% 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 (the land is inventory to the partnership). Paul will recognize:
a. $0 gain or loss.

b. $60,000 capital gain.

c. $60,000 ordinary income.

d. $36,000 ordinary income.

e. $36,000 capital gain.

Answer 1

Answer: B. $60,000 capital gain

Explanation: The land being sold at the rate of $160,000 having a book value of $100,000 will make Paul the owner realise a gain on the sale of the asset of $60,000 (capital Gain)

The gain on the land is a capital gain to Paul as he held the land for investment purpose before selling the land to the partnership business he has a 60% capital interest in.

To Paul, the gain is a Capital gain to him as he owns the asset wholly before selling it to the partnership business which is a real estate business .