Discussion:Capital Interest Characterization
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Discussion Forum Index --> Basic Tax Questions --> Capital Interest Characterization
Discussion Forum Index --> Tax Questions --> Capital Interest Characterization
| 20 August 2009 | |
| When an individual receives a capital interest in exchange for his services to a partnership whose stated purpose is to purchase, lease out, and ultimately sell real property, assuming said individual realized a gain upon the sale, would the gain be characterized as ordinary income or as a capital gain? | |
| 20 August 2009 | |
| Dingo, if the partnership held the property as inventory ...then the gain on its sale is ordinary income.
However, if the partnership held the property as an investment .... then the gain on its sale is capital gain. You'll need to read some tax literature that compares and contrasts "inventory vs investment" .... and then let the partnership draw its own conclusion based on the specific facts & circumstances concerning the property that the partnership deals with and other variables regarding the partnership's business intent. | |
| 20 August 2009 | |
| Thank you. I was uncertain if IRC 707 or 724 would cause the gain to be traced to the services provided by the "sweat equity" partner and result in ordinary income. | |
Harry Boscoe (talk|edits) said: | 20 August 2009 |
| Seems to me the income from the sweat equity contribution would be taxable to the sweat-er at the time he receives his "capital interest" in the partnership. And then the sale of a house/building/whatever would be reported separately and independently. What was the value of the capital interest at the time that the worker-partner received it? And don't forget the SE tax on that value, too, probably. | |
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