Warren Buffett owns land that he received from his father 10 years ago as a gift
ID: 2568995 • Letter: W
Question
Warren Buffett owns land that he received from his father 10 years ago as a gift. The land was purchased by his father in 1995 for $5,000 and was worth $10,000 at the time of the gift. The property is currently worth about $50,000. He is considering selling the land and purchasing a piece of property in the mountains. Warren Buffett also owns 800 shares of AppleCo stock. He inherited the shares from his grandfather when he died in 1998. Warren Buffett’s grandfather paid $10,000 for the shares and at the time of his death, the shares were worth $60,000. He is considering selling his shares. Warren Buffett purchased a building in 2016 for $500,000. The building was destroyed by a fire on March 2017. Fortunately the building was partially insured. He received a reimbursement of $100,000. Warren Buffett divorced his wife in 2017. In 2010, Warren Buffett and his wife purchased a home for $300,000. At the time of divorce, the home is worth $700,000. As part of the divorce, Warren Buffett receives the home. He wants to sell it for $700,000. Warren Buffett has come to you for tax advice with respect to the land, shares, building and home. What is the recognized gain or loss for the land, shares and home if they are sold? What is recognized gain or loss for the building that was destroyed by the fire.
Explanation / Answer
1. Land:-
Tax Advice:- Differnece between sale consideration and fair value at time of gift will be long term capital gain. In other words:
Long term capital gain =$ 50,000-$ 10,000=$ 40,000
However exemption wpould be available for the amount spent on purchasing a property in mountains
2. Shares of Apple. Co Stock: The Differnece between sale value and value at the the time of death of grandfacther will be treated as Long term Capital gain and will be taxed accordigly. In other words
Long Term Capital gain= Sale consideration- $ 60,000
If sale consideration is less than $ 60,000, there will be long term capital loss
3.Tax treatment on building:- The diffrence between reimbursement received and cost price of building will be short term capital loss. In other words:
Short term capital loss= $100,000-$500,000= $ 400,000
4. Tax treatment on sale of home=The difference between sale consideration and cost price will be charged to long term capital gain. However theere will be
Sale consideration= $ 700,000
Less : Cost= $ 300,000
Long term capital gain= $ 400,000
Less: Excursion= $ 500,000 (Sine property is used by husband and wife for minimum 2 years for self residence
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