Question

Problem 16-25 (LO. 2) Maria meets all of the requirements of § 1237 (subdivided realty). In 2019, 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. a. What are the realized and recognized gain? The realized gain is $ and recognized gain is $ b. What is the nature of the gain (i.e., ordinary income or capital gain)? The gain is considered gain. c. Assume instead that the lots sold to the fifth purchaser were not contiguous If the lots sold to the fifth purchaser were not contiguous, Maria would have $ ordinary income, and the gain would be long-term capital gain

Answer 1

a). Realized gain = 87,000; recognized gain = 87,000

b). It is a capital gain, as per Sec 1237.

c). Beginning with the year in which the sixth lot is sold, 5% of the revenue from sale of lots is recognized as ordinary income.

Ordinary income = 6,000; capital gain = 81,000

Calculations:

Formula Price per lot*6 Selling price (SP) Expense per lot*6 Less: selling expense (SE) SP-SE Amount realized (A) Basis per lot*6 Basis G = A-B Realized & recognized gain Classification of recognized gain: 5% SP Ordinary income (01) Less: selling expense (SE) OI-SE Ordinary gain (OG) G-OG Capital gain 180000 -3000 177000 -90000 87000 9000 -3000 6000 81000