Question

Your client, Alternate Fuel, Inc. (a regular corporation), owns three sandwich shops in the Philadelphia area. In 2016, the year Alternate Fuel incorporated, it acquired land on the outskirts of Philadelphia with the hope of someday farming the land to cultivate humanely harvested meat and grow organic fruits and vegetables to use in its sandwich shops. In 2018, Alternate Fuel drew up plans for the farm and began consulting with agricultural experts about the best locations for crops and the number of animals that could be sustained on the acreage. After reviewing those plans, Alternate Fuel's CEO decided that the plans are not currently financially feasible and would like to sell the land in 2019. The land has appreciated substantially in value, and the company could use the cash infusions. Given that the land has not been used in the business, will any gain realized be categorized as a 1231 gain or as a long-term capital gain? Explain.

Answer 1

Gain realized from the sale of land will not be categorized as 1231 gain.

Section 1231 property is a type of property, defined by section 1231 of the U.S. Internal Revenue Code. Section 1231 property is real or depreciable business property held for more than one year. Gain from the sale of 1231 property is taxed at the lower capital gains tax rate versus the rate for ordinary income or ordinary long-term capital gain.

Therefore, Gain realized from the sale of land will not be categorized as 1231 gain as it was held for business purpose but in the end, it was not used for the business purpose and also the value of land is substantially appreciated but as per the code property should be depreciable.

Alternate Fuel, Inc. is liable to pay an ordinary rate of tax. This gain realized cannot be categorized as a 1231 gain.