Question

Maria meets all of the requirements of § 1237 (subdivided realty). In 2019, 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. What is the nature of the gain (i.e., ordinary income or capital gain)?
c. Would your answer change if, instead, the lots sold to the fifth purchaser were not contiguous? If so, how?

Answer 1

(a)-- What are the realized and recognized gain?

Answer -

The realized and recognized gain :

= (Selling price - Selling expenses) - Basis

= [($30000 per lot * 6 lots) - ($500 per lot * 6 lots)] - $15000 per lot * 6 lots

= ($180000 - $3000) - $90000

= $87000.

.

(b)-- What is the nature of the gain?

Answer -

It is a long-term capital gain as per § 1237.

.

(c)-- Would your answer change if, instead, the lots sold to the fifth purchaser were not contiguous? If so, how?

Answer -

If the lots sold to the fifth purchaser were not contiguous, Maria would have :

Ordinary income :

= [(5% * Selling price) - Selling expenses] = [(5% * $180000) - $3000] = $6000.

Long-term capital gain :

= Realized and recognized gain - Ordinary income

= $87000 - $6000

= $81000.