Question

Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp. at fair market value. The fair market value of the building was determined to be $502,500; Luke built the building several years ago at a cost of $375,000. Luke had claimed $56,500 of depreciation expense on the building. The fair market value of the land was determined to be $254,000 at the time of the sale; Luke purchased the land many years ago for $147,750.

a. What is the amount and character of Luke’s recognized gain or loss on the building?

b. What is the amount and character of Luke’s recognized gain or loss on the land?

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Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $16,250 §1231 loss on the sale. The second is land that will generate a $7,300 §1231 gain on the sale. Aruna’s ordinary marginal tax rate is 30 percent. (Input all amounts as positive values.)

a. Assuming she sells both assets in December of year 1 (the current year), what effect will the sales have on Aruna’s tax liability?

b. Assuming that Aruna sells the land in December of year 1 and the machinery in January of year 2, what effect will the sales have on Aruna’s tax liability for each year?
      

Answer 1

Question 1:

Part a:

Particulars	Amount ($)	Amount ($)
Sale proceeds from building		502500
Less: Adjusted cost of building
Cost of building	375000
Less: Depreciation	56500
		318500
Long term capital gain (502500 - 318500)		184000

Thus, amount is $184,000 and the nature is capital gain.

Part b:

Market value of land	254000
Less: Purchase value of land	147750
Gain on appreciation of land value		106250

Thus, amount is $106,250 and the nature is appreciation in value of asset.

Question 2:

Tax liability of Aruna
Gain on sale of second land	7300
Less: Loss on sale of Machinery	16250
Net capital loss		-8950
Tax rate	30%
Reduction in tax liability (8950 x 30%)	2685
Year 1
Loss on sale of Machinery	16250
Tax rate	30%
Reduction in tax liability (16250 x 30%)	4875
Year 2
Gain on sale of land	7300
Tax rate	30%
Increase in tax liability (7300 x 30%)	2190