Question

Ross would like to dispose of some land he acquired five years ago because he believes it will not continue to appreciate. Its value has increased by $50,000 over the five-year period. He also intends to sell stock that has declined in value by $50,000 during the eight-month period he has owned it. Ross has four offers to acquire the stock and land. Identify the tax issues relevant to Ross in disposing of this land and stock. Buyer 1: Exchange land. Buyer 2: Purchase land for cash. Buyer 3: Exchange stock. Buyer 4: Purchase stock for cash.

Answer 1

Buyer 1: Exchange land.

Qualifies for §1031 deferral treatment. If Ross disposes of the land in exchange for another asset, he can differ the payment of capital gains taxes.

Buyer 2: Purchase land for cash.

If Ross sells the land for cash, then he will have a $50,000 long term capital gain which can be offset against a long term capital gain or a short term capital loss. In this case, Ross may want to sell the stocks in order to offset any taxes.

Buyer 3: Exchange stock.

The loss on the sale of stocks cannot be deferred (does not qualify for §1031 deferral treatment).

Buyer 4: Purchase stock for cash.

If Ross sells the stock for cash, he will be able to report the $50,000 short term capital loss, and he is able to offset the long term capital gain from selling the land.