Question

B purchased two parcels of land in 20X4 for $50,000 each. Parcel 1 was purchased to hold until its value increased and then offered for sale. Parcel 2 was purchased to build a rental property and collect rents over time. In 20X9 parcel 1 was sold for $40,000 and parcel 2 was sold for $100,000 as part of the rental property sale. Determine the amount that B’s net income for tax purposes will increase in 20X9.

Answer 1

Only the land-1 should be considered as net income, because the other land, land-2, is the capital investment by the owner to his rental property project and not a part of 20X9 net income.

Land-1 was purchased for $50,000 and sold $40,000; therefore, the net income is actually a net loss that should be in negative figure.

Net income = Sale price – Purchase price

                   = $40,000 - $50,000

                   = -$10,000

Answer: Net income decreases by $10,000.