Question

John sold a rental property (ACB $250,000) to his wife, Deborah, for $400,000 on January 5, 2018. At the time of this sale, the fair market value was $600,000. Deborah held onto the rental property until December 27, 2018, when she sold it for $850,000. What are the taxable capital gains that John and Deborah must report on their 2018 tax returns with respect to the sale of the rental property? Assume that neither individual has any principal residence claims on the rental property.

	The taxable capital gains are $75,000 for John and $225,000 for Deborah.
	The taxable capital gains are $175,000 for John and $225,000 for Deborah.
	The taxable capital gains are $75,000 for John and $125,000 for Deborah.
	The taxable capital gains are $175,000 for John and $125,000 for Deborah.

Answer 1

ection 45(2) was inserted in the Act w. e. f. 01.04.1985. However, the Act did not contain any provision for taxability in the event of conversion of Stock-in-trade into or its treatment as Capital Asset.

After more than 3 decades of this amendment, the Memorandum explaining the provisions seek to suggest that there was an asymmetrical treatment and that there was deferment of tax payment by converting of Inventory into Capital Asset. Both these observations seem to be delayed and a fractured response to the need for this amendment.

As the asset purchased o the same year and is selling on same year it will not come under stock to trade, it will consider as normal business travel and taxable capital gain will be 175000 for John and 125000 for Debotah