§735 Character of Gain or Loss on Disposition of Distributed Property

Summary

When a partner sells property they got from a partnership, certain kinds of gain or loss are treated as ordinary income or ordinary loss. That rule applies to unrealized receivables (defined in section 751(c)) and to inventory items (defined in section 751(d)) sold or exchanged within 5 years of the distribution. The partner’s holding time for distributed property generally includes the time the partnership held it (see section 1223). There are special rules. When using the inventory definition, ignore any holding period rule in section 1231(b). If the distributed property is moved into a tax-free (nonrecognition) deal, the same ordinary treatment follows any replacement (substituted basis) property, including for chains of such deals. That carryover rule does not apply to C corporation stock received in an exchange under section 351.