Maria meets all of the requirements of 1237 (subdivided realty). In 2015, she be
ID: 2482157 • Letter: M
Question
Maria meets all of the requirements of 1237 (subdivided realty). In 2015, 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? b. Explain the nature of the gain (i.e., ordinary income or capital gain). c. Would your answers change if, instead, the lots sold to the fifth purchaser were not contiguous? If so, how?
Explanation / Answer
Sales price (6 lots $30,000) $180,000
Sales expenses (6 lots $500) $ 3,000
Amount realized $177,000
Less: Basis (6 lots$15,000) $90,000
Realized and recognized gain $87,000
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The entire $87,000 is long-term capital gain from the sale of the first five lots. Contiguous or adjacent lots sold to a single purchaser are considered to be one lot. Thus, under 1237, five lots (not six) were sold.
If the two lots sold to the fifth purchaser were not contiguous, the total lots sold would be six rather than five. Since Maria has now sold six or more lots, 5% of the total selling price of all the lots sold in 2011 is treated as ordinary income. This ordinary income is offset by any selling expenses associated with selling the lots.