A partnership has 'hot assets' (inventory). Partner A sells their interest. The partnership has substantially appreciated inventory. Is the gain on sale capital or ordinary?

Answer options:

All Capital Gain.

All Ordinary Income.

Ordinary income to the extent of Section 751 assets; Capital gain for the rest.

No gain recognized.

How to approach this question

1. Identify Sale of Partnership Interest: Generally capital gain. 2. Exception: Section 751 'Hot Assets' (Unrealized receivables and inventory). 3. Rule: Gain attributable to the partner's share of hot assets is recharacterized as ordinary income. 4. Result: Mixed character.

Full Answer

C.Ordinary income to the extent of Section 751 assets; Capital gain for the rest.✓ Correct

Under Section 751(a), the amount of money received by a transferor partner in exchange for all or part of his interest in the partnership attributable to unrealized receivables or inventory items is considered as an amount realized from the sale or exchange of property other than a capital asset (ordinary income).

Common mistakes

Treating the entire gain as capital.

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