Which of the following is a 'Section 751 asset' (Hot Asset) that triggers ordinary income recognition upon the sale of a partnership interest?

Answer options:

Capital assets held for less than one year.

Section 1231 assets.

Unrealized receivables and inventory items.

Cash.

How to approach this question

Hot Assets = Unrealized Receivables + Inventory. These create Ordinary Income, not Capital Gain, when you sell your partnership interest.

Full Answer

C.Unrealized receivables and inventory items.✓ Correct

Section 751 assets ('Hot Assets') include unrealized receivables (cash basis A/R) and inventory items. When a partnership interest is sold, the portion of the gain attributable to these assets is treated as ordinary income.

Common mistakes

Thinking all gain on sale of partnership interest is capital.

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