Question

1. Duncan owns 5,000 acres of undeveloped real property which he purchased for investment for $1 million 10 years ago. On 9/1/20 Johnny Miller Golf Courses purchases an option to purchase the property for $3 million anytime in the next 12 months. Miller pays Duncan $20,000 for this right. On 8/31/21 Johnny Miller exercises the option. How do Duncan and Johnny Miller treat (for tax purposes) the issuance of the option and the exercise of the option?

Answer 1

When the Duncan receives the token amount for selling the property he should trat such amount as income from other sources for that respective year for that year

When the Miller exercises the right to purchase he should classify the gain as long term capital gain under income from capital gain under the head income from capital gain for tax purposes.

Miller when paid the token he should not recognize the payments of 20000 as business payments but when he exercises the right to purchase the golf course he should claim the deduction under business income according to tax purposes.