Question

Several years ago, Nicolas, a timber dealer, purchased a tract of land with a substantial stand of trees on it. The land cost $8,000, and the timber cost $250,000. On the first day of 2018, the timber was appraised at $325,000. In August 2018, Nicolas cut the timber and sold it for $360,000. Nicolas elects to treat the cutting as a sale or exchange under § 1231.

As a result, Nicolas has a $________ § 1231 gain and a $_________ ordinary gain.

Answer 1

Nicolas has a $75000 § 1231 gain

ordinary gain = $35,000

Step-by-step explanation:

Data provided in the question:

Cost of the land = $8,000

Cost of timber = $250,000

Appraised value of timber = $325,000

Selling cost of the timber = $360,000

Now,

Gain = Appraised value of Timber - Adjusted basis

or

$325,000 - $250,000

= $75,000

Thus,

Ordinary gain = Selling price - Appraised value of Timber

Ordinary gain = $360,000 - $325,000

= $35,000

Therefore,

Nicolas has a $75000 § 1231 gain

ordinary gain = $35,000