TCP Partnerships · Updated November 2026
Why Can Selling a Partnership Interest Produce Ordinary Income?
Section 751 preserves ordinary-income character for specified assets inside the partnership when an interest is sold.
Hot assets
Common hot-asset concepts include unrealized receivables and certain inventory items.
Sale of interest
Without the rule, a partner could potentially convert embedded ordinary income into capital gain by selling the partnership interest.
Split the gain
A sale can therefore produce an ordinary-income portion and a capital-gain or loss portion.
The takeaway
Section 751 looks through the partnership interest to preserve ordinary-income character.
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FAQ
Is all gain on sale of a partnership interest capital gain?
No.
Why are unrealized receivables important?
They can represent ordinary income embedded in the interest.
Does Section 751 primarily affect character?
Yes.