Question

For the past 20 years, Ginny has operated her tailoring and alterations business out of a 700-square-foot, commercial office building, at 4000 Central. Last year, Ginny signed a five-year lease with Kelly Real Estate Management, the owner of the building. This year, Kelly decided to convert the building into lofts and is negotiating with all its tenants to surrender their leasehold rights and vacate their space in the building. Kelly has offered Ginny a $60,000 cash payment and the use of a 1,000-square-foot office and workshop in a new location. If Ginny accepts Kelly’s offer, she can use the new office and workshop rent free for 36 months. The fair rental value of this new location is $1,000 per month.

Required:

1. Calculate the amount that Ginny will realize based on the facts given.

2. Describe the tax consequences of this asset disposition. Identify the type of asset and provide an overview.

3. Identify the character of any income/gain.

4. Based on the character of income, discuss the various taxes that may apply.

5. Differentiate between ordinary income and preferential rates and the significance of each.

Answer 1

sol:

1)Ginny will realize $60000 based on the facts given.

2) Transfer of lease holding right arises capital gains and the consideration for that is $60000 plus fair value of free of cost premises for running business (i.e.,=$1000*12*3=$36000) therefore total consideration comes to $96000.

3)The character of income arising is Capital Receipt.

4)As the receipt is a capital receipt capital gains tax need to assessed on the net gain on transfer of lease holding right.

5) ordinary income refers to income earned in the ordinary course of business and income taxable at preferential rates refers to casual income which does not arise in the normal course of business.

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