48. LO.3 Carla was the owner of vacant land that she was holding for investment.

Question

48. LO.3 Carla was the owner of vacant land that she was holding for investment. She paid $1 million for the land in 2013. Raymond was an investor in vacant land. He thought Carla’s land might be the site of an exit ramp from a new freeway. Raymond gave Carla $836,000 for an option on her land in 2014. The option was good for two years and gave Raymond the ability to purchase Carla’s land for $4,765,000. The freeway was not approved by the government, and Raymond’s option expired in 2015. Does Carla have $836,000 of long-term capital gain upon the expiration of the option? Explain.

Explanation / Answer

This gain of $ 836000 is treated as ordinary income in the hands of the grantor of the option (privilege to purchase),ie. Carla, as she is still holding the capital asset.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.