Question

Nikki owns and carries on a chain of clothing stores. So far she has 7 of such stores. When she chooses a premises to open a new store on, the most important criterion is where she can maximise the sales of clothes. However, she is also influenced by the potential for the land on which each of the shop premises is located on to grow in capital value. In late 2019, Nikki decides to develop one of the shop premises, because real estate in the area which it is located on had appreciated markedly in recent years. This involved Nikki obtaining a building approval from the local council, demolishing the shop, and building a 6 storey apartment building on the land. As Nikki did not know much about building, this consisted of contracting a major builder to be in charge of the process of building the apartment. These apartments are sold individually to the public through a leading real estate agent.Ignoring CapitalGains Tax, discuss whether the sales proceeds from the apartments generate ordinary income.

approximately 450 words

Answer 1

No sales proceeds from the apartment generates ordinary income because of ignoring capital tax gain

In the Nikki 's point of view her intention was to maximize sales, she can think it as sale proceeds from apartments

apart from that nikki is  influenced from potential land for development in order to grow capital value

Nikki developed her land so she has to owe capital gain tax

She has paid tax only for 6 shops as income from business but she has to pay tax as commercial building as capital gain tax.

She declarared that land as a commercial building and she has pay capital gain tax.

But when she constructed as commercial building, she declares as income from capital gain and when she give for rent then she declares as income from House property

But that income is not treated as sale proceeds from apartments.

As per income tax rule , income comes from rent of property treated as income from house property and income gained  from sale of building treated as capital gain.

Conclusion: In the Nikki point of view, she can think it as sale proceeds

But for the tax purpose, it treated as capital gain tax.

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