Ross would like to dispose of some land he acquired five years ago because he be
ID: 2501936 • Letter: R
Question
Ross would like to dispose of some land he acquired five years ago because he believes that it will not continue to appreciate. Its value has increased by $50,000 over the five-year period. He also intends to sell stock that has declined in value by $50,000 during the eight-month period he has owned it. Ross has four offers to acquire the stock and land: Buyer number 1: Exchange land. Buyer number 2: Purchase land for cash. Buyer number 3: Exchange stock. Buyer number 4: Purchase stock for cash. Identify the tax issues relevant to Ross in disposing of this land and stock.
Explanation / Answer
Tax Issues relevant to Ross in disposing of land and stock under each alternative is dicussed below:
1) Exchange Land: Assuming it is qualified as like kind exchanges under section 1031so increased value of land would not be taxed in the hands of Ross immediately as long term capital gain but the Basis of new exchanged land would be the basis of old land.
2) Sell land to buyer 2 for cash : under this option Ross would incurr a long term capital gain of $50000 and there would be no adjustment to basis of new land.
3) Exchange stock : Since stock is excluded from section 1031. Moreover exchange of stock is also not treated as transaction and therefore no tax treatment of loss of 50000. However the basis and duration of old stock is transffered to ne stock. So new exchanged stock will deemed to have duration 8 months period and the old basis.
4) Sell stock for cash to buyer 4: The loss of 50000 would be allowed as short term capital loss.
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