Sam purchased 80 acres of farmland in May 1984 for $270,000 on which he conducted a beef cattle breeding operation. In February 1995 he purchased an additional 20 acres of adjoining farmland for $110,000 in order to expand his operation. There was no house on the farmland so Sam lived in the nearby township. Due to ongoing drought conditions and Sam’s advancing age, he decided in 2017 to sell and retire from farming. A local real estate agent valued the property at $440,000. Given the time and effort Sam had put into the farm over the years he didn’t feel this was enough of a return on his investment. As the property was located close to town, the real estate suggested that Sam consider selling the land as a sub-division. This would likely generate a higher return per acre than selling the property as farmland.
Sam re-zoned and received council approval for the sub-division in May 2017. Over the period from July 2017 to January 2018 Sam spent $450,000 on sub-division costs such as surveyor fees, electricity and water connections and main road access. In April 2018 a local construction company agreed to buy the entire sub-division for $1,100,000. Although the contract for sale was dated in April, settlement didn’t take place until July 2018. Agent’s commission and legal fees payable by Sam amounted to $45,000.
Required:
Advise Sam of the taxation consequences of the above transactions (15 marks).
Ans. Sam has total investment in property is:
Sam purchased 80 acres of farmland = $270,000 (May 1984)
20 acres of adjoining farmland = $110,000 (February 1995)
Sub-division costs = $450,000 (July 2017 to January 2018) (excluded while calculating capital gains)
Agent’s commission and legal fees = $45,000 (April 2018)
Total investment = $270,000 + $110,000 + $45,000 = $425,000
Earned by selling sub- division = $1,100,000
Capital gain = $1,100,000 - $425,000 = $675,000
Capital gain tax is 20% when capital gains is $425,801 or more)
Capital gain tax = 20% of $675,000 = $135,000
From the above transactions it is suggested to Sam that his capital gain from the property is $675,000.He can reduce his tax liability by capital losses. If Sam had suffered from any kind of capital losses during the past years from he started investing in property. Then these capital losses are helpful to him for reduce capital gains ,so that, tax is also reduced according to reduced capital gains. From the above data, Sam purchased land for $380,000, and Agent’s commission and legal fees were $45,000. Therefore, his total investment is in the property is $425,000. Sub-division costs are not included as expenses when calculating capital gains. he earned $1,100,000 by selling the sub- division to a local construction company. Difference between the sales and investment is the capital gain that is $675,000. 20% capital gain tax is imposed on capital gains in 2018, and $135,000 is his capital gain tax as calculated above in the answer.
Sam purchased 80 acres of farmland in May 1984 for $270,000 on which he conducted a...