Question

On June 1, 2015, Mario entered into a contract to sell real estate for $1 million (adjusted basis $200,000.) The sale was conditioned on a rezoning of the property for commercial use. A $50,000 deposit placed in escrow by the purchaser was refundable in event the rezoning was not accomplished. After considerable controversy, the application was approved on November 10, and two days later, the sum of $950,000 was paid to Mario’s estate in full satisfaction of the purchase price. Mario had died unexpected on November 1. Discuss the estate and income tax consequences of this set of facts if it is assumed that the sale of the real estate occurred:

1. After Mario’s’ death
2. Before Mario’s death
3. When do you think the sale occurred? Why?

Please include references

Answer 1

If sale of the real estate occurred after Mario's death, following are the estate and tax consequences:

• Capital gain of $800,000 will arise on sale of real estate is taxable in the hands of legal heir of Mario.
• Whether it is short term capital gain and Long term capital gain it depends on the period of real estate held by Mario. If the real estate held for more than 24 months then the capital gain would be termed as long term capital gain.

If sale of the real estate occured before Mario's death, following are the estate and tax consequences:

• Capital gain of $800,000 ($1000,000 - $200,000) will arise on sale of real estate is taxable in the hand of Mario.
• Whether it is short term capital gain and Long term capital gain it depends on the period of real estate held by Mario. If the real estate held for more than 24 months then the capital gain would be termed as long term capital gain.
• Long term capital gain will be taxable @ 20% with indexation and @ 10% without indexation and Short term capital gain will be taxable @ 15%.

The sale is occurred when all the conditions of contract of sale of real estate is approved by both the parties (Seller and Buyer) . Hence sale is occurred on November 10 when application was approved.