In: Accounting
CORRECT AND DETAILED ANSWER NEEDED! THANK YOU!
Sandra inherited $200,000 from her grandmother’s estate and decided to invest the money. Sandra and her husband, Dan, purchased a parcel of land in an undeveloped, wooded area a few blocks from their current home. At the time of purchase, they felt that in the future they may use the land to build a new home. However, they were equally motivated by the fact that the land was a solid investment and would very likely gain value quickly. They ended up selling the land four years after the purchase for $350,000.
Should the $150,000 gain be treated as a capital gain or as business income? Justify your conclusion.
The gain of $150,000 should be treated as a capital gain and not as the business income.
Capital gain refer to the gain earned by the person from the sale of any capital asset, where capital asset means anything that you own for your own personal purpose and not for the pupose of business.
And, business income refers to the profit earned by a person from the sale of goods or services produced by him/her.
Important reasons of considering $150,000 as a capital gain:
1) The land was purchased from the inherited amount of money and the primary pupose of buying the land was to invest into the real estate and not to make profits.
2) Sandra and her husband, Dan, purchased the land near to their home with the intention of building a new home for their own personal use and not for the pupose of trading.
3) In business income, the assets are held only for short duration by the businessmen and then were sold to make profits but in the above mentioned scenario, the asset(or land) was held for 4 years by the couple.
4) For a gain to be accounted under the head of business income, it is must that it should be incurred from the transactions that are repetitive in nature but in the given case, the nature of transaction is not repetitive.
But, if same type of asset is repeatively bought and sold by the couple then we could say it as a business income.
5) Land is a non current asset which was generally held by the people for long term investment or personal use and not for the pupose of resale.