Maria meets all of the requirements of § 1237 (subdivided realty). In 2016, she
ID: 2791746 • Letter: M
Question
Maria meets all of the requirements of § 1237 (subdivided realty). In 2016, 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 $ 87,000 and recognized gain is $ 87,000 . Feedback Congress has often expanded the § 1221 general definition of what is not a capital asset.
b. What is the nature of the gain (i.e., ordinary income or capital gain)? The gain is considered a long-term capital 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.
Explanation / Answer
a. The realized and recognized gains?
Total Sales price= 6*$30,000= 180,000
Less: Sales Exp= 6*500 = 3,000
Less: Basis 6*15000) = 90,000
Realized gain 87,000
Recognised Gain 87,000
b. The sale of first five lots will be treated as capital gain since two contiguous sales were made to a purchaser will be treated one lot so total sales are five lots so entire $87,000 is long-term capital gain from the sale of the first five lots.
c. 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.