Question

Maria meets all of the requirements of § 1237 (subdivided realty). In 2017, she begins selling lots and sells four separate lots to four different purchasers. She also sells two contiguous lots to another purchaser. The sales price of each lot is $30,000. Maria’s basis for each lot is $15,000. Selling expenses are $500 per lot. What are the realized and recognized gain? Explain the nature of the gain (i.e., ordinary income or capital gain). Would your answers change if, instead, the lots sold to the fifth purchaser were not contiguous? If so, how?

Answer 1

1) $87,000

2) Capital Gain

3) Ordinary Income

Step-by-step explanation:

When any capital assets are transferred from one owner to another, in that case, a capital gain arises, apart from that any income arises this will be considers ordinary income and taxed according to law.

Realized and recognized gain

Sales price 30,000*6 = 180,000

Sales expenses 500*6 = 3,000

Amount realized = 177,000

Less: Basis 15,000*6 = (90,000)

Realized and recognized gain = $87,000

Nature of the gain (i.e., ordinary income or capital gain):

The entire 87000 is long term capital gain and shall be taxed

Would your answers change if, instead, the lots sold to the fifth purchaser were not contiguous?

If Maria sell to the 6th purchaser or more than the 6th the selling price shall be treated as ordinary income.