Question

Jenny, a real estate developer, identified piece of real estate owned by Porky that she would...

Jenny, a real estate developer, identified piece of real estate owned by Porky that she would like to develop. Before purchasing the property she needed to be sure this property would serve her purposes. So she performed market research and investigated the ability to rezone the property. This was going to take about 8 to accomplish. To prevent anybody else from purchasing the property prior to completing her due diligence, she secured an option on the property. The option cost 25.000, but it gave her the exclusive right to buy the property for the next 9 months. The option provides that Porky retains the 25.000 if the option is not exercised. However,if it is exercised, the $25,000 becomes part of the $1,000,000 contract price of the estate. After completing her due diligence, Jenny decide not to purchase the property. She allows the option to expire. What are consequences?

Check as many as are correct:

A- Porky has $25,000 of ordinary Income receipt of the option money

B- Porky has $25,000 ordinary income on the date the option expired

C- Jenny has $25,000 loss on the purchased the option

D- Jenny has capital loss of $25,000 when the option expired

E- None of the above

Homework Answers

Answer #1

For Porky, the option premium is classified as income only when the option is lapsed by Jenny. It shall not be corded on the date of receipt of money since, on such date it is not sure whether the premium shall be treated as income or form part of contract price.

For Jenny, If she excercises the option, then the premium would form part of cost of the building. If she lapses, then it shall be capital loss. Since, the loss would be only determined after she lapses and not any time before, the loss should be recognized only when the option expired.

Hence, the answer for this question is "Option B- Porky has $25,000 ordinary income on the date the option expired." and "Option D- Jenny has capital loss of $25,000 when the option expired."

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