Hot Asset Rules. 1 hot assets unrealized receivables as defined in 751c and substantially appreciated inventory as defined in 751b3 and d. There are look-through rules that apply to collectibles and Section 1250 capital gain IRC Section 1h.
Section 751b provides that in certain circumstances a distribution of property or money can result in the recognition of gain or loss to the recipient partner andor the partnership. Section 751 in turn provides that As gain is ordinary income to the extent it is attributable to the three categories of so-called hot assetscash-basis receivables appreciated inventory and. The current regulations under 751b require the identification of two classes of assets.
It includes items that are obvious such as accounts receivable of a cash-basis taxpayer it also includes items that are not intuitive.
And 2 cold assets assets other than unrealized receivables and substantially appreciated inventory. The hot asset rule of section 751b is very complicated. Section 1250 is not a hot asset. If a transaction would change a partners interest in these assets an accounting must be made and the related ordinary income is recognized by the affected partner.
