At the beginning of 2018, Ms. P purchased a 15 percent interest in PPY Partnersh

Question

At the beginning of 2018, Ms. P purchased a 15 percent interest in PPY Partnership for $23,000. Ms. P’s Schedule K-1 reported that her share of PPY’s debt at year-end was $22,000, and her share of ordinary loss was $41,550. On January 1, 2019, Ms. P sold her interest to another partner for $3,000 cash.

How much of her share of PPY’s loss can Ms. P deduct on her 2018 return

Compute Ms. P’s recognized gain on sale of her PPY interest.

How would your answers to parts a and b change if PPY were an S corporation instead of a partnership?

Explanation / Answer

Solution:

Answer (a):

Ms. P initial cost basis in her partnership interest = $23,000

Increased by share at year end = $22,000

Decrease by share of ordinary loss = ($41,550)

Adjusted basis = (23,000 + 22,000 – 41,550)

Adjusted basis = $3,450

So, the entire $41,550 share of loss can be deducted on the year end return.

Answer (b):

Amount realized on sale = debt relief + cash

= $22000 + $3000

= $19,000

Adjusted basis= $3,450

So, the gain recognized on sale of partnership interest = $(19,000-3,450)

The gain recognized on sale of partnership interest = $15,550

Answer (c):

If the partnership was based on S corporation principle, then Ms P’s basis will not include the share of entity’s debt.

So the adjusted basis on Jan 1, 2019 will be 0 and she would have $3,000 gain on the sale of her S corporation stocks.

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