Question

Claude purchased raw land three years ago for $1,500,000 to develop into lots and sell to individuals planning to buildtheir dream homes. Claude intended to treat this property as inventory, like his other development properties. Beforecompleting the development of the property, however, he decided to contribute it to South Peak Investors LLC when itwas worth $2,500,000, in exchange for a 10 percent capital and profits interest. South Peak’s strategy is to hold land forinvestment purposes only and then sell it later at a gain.a) If South Peak sells the property for $3,000,000 four years after Claude’s contribution, how much gain or loss isrecognized and what is its character? [Hint: See §724.]b) If South Peak sells the property for $3,000,000 five and one-half years after Claude's contribution, how much gain orloss is recognized and what is its character?

Answer 1

Answer and Explanation:

Clude had purchased the raw land three years ago for $150000 and treated it like a inventory. she constributed the property to south peak investments LLC in exchange for 10% profit interest. but south peak will hold it for investment purpose.

a) after 4 years from Cludes contribution south peak sells the land for $3000000 the gain would be $3000000 - 1500000 = 1500000. the character is of long term capital gains since ths LLC held ot as investment asset

b) if south peak sells the asset after 5 years six months then also the gain would be sa,e and character would be same since LLC has held the asset fore investments purpose and at the same time its holding period is above one year.