Question

olivia wants to buy some vacant land for investment purposes. she cannot afford the full purchase price. instead, olivia pays the landowner $36,500 to obtain an option to buy the land for $730,000 anytime in the next four years. fourteen months after purchasing the option, olivia sells the option for $45,625. what is the amount and character of olivia's gain or loss?

Answer 1

Olivia's gain is $9,125, which is considered a capital gain.

Step-by-step explanation:

Olivia's gain or loss can be determined by calculating the difference between the amount she paid for the option and the amount she sold it for.

Olivia paid $36,500 to obtain the option to buy the land for $730,000, so her initial investment is $36,500. Fourteen months later, she sells the option for $45,625. To calculate her gain or loss, we subtract her initial investment from the selling price:

Gain/Loss = Selling Price - Initial Investment

Gain/Loss = $45,625 - $36,500 = $9,125

Therefore, Olivia's gain is $9,125. It is important to note that her gain is considered a capital gain since she made a profit from the sale of an investment asset.