Question

Briefly explain whether the following receipt is ordinary income for the taxpayer:

The taxpayer purchased land to use for growing corn. He bought the land for $300,000 in 2005. He commenced farming activities but realised in 2007 that the soil was not suitable for the crops he wished to grow. The taxpayer decided to sell the land but he first wished to develop it for sale. He connected the necessary services and delegated tasks to the relevant professionals. He had an agent arrange most of the sales. He slowly disposed of parts of the land over 10 years until the final block was sold in 2017. The development costs were $500,000. He sold 20 blocks and the total sum received was $1,400,000.

Answer 1

Hi,

Lets first discuss the meaning of ordinary income for the taxpayer. Ordinary income refers to the income that includes all short term gains, wages ,salaries, commission but excludes long term gains.

To qualify for short term or long term gains, any income accrue or arises from assets held for more than twelve months qualify for long term gains.

In the question, it is stated that land is purchased in 2005 and developed in 2007 ,thereafter sold in blocks over 10 years period.

The income arises from asset is held for more than twelve months, thus qualify as long term gains.

Therefore ,the receipts is not ordinary income for the taxpayer.