Question

Four years ago, Company PJ acquired 1,000 acres of undeveloped land. On the date of the exchange, the land's FMV was $700,000. During the past four years, the land appreciated in value. by $600,000; a recent appraisal indicated that it is worth $1.3 million today. Howaver, if company PJ sells the land for $1.3 million, the taxable gain will be $825,000. Can you explain this results?

Answer 1

Answer:

The purchase price, commission and other expenses is of $475,000 deducted from the sales proceed of $1.3 million to arrive at the taxable gains of $825,000.

Explanation:

Taxable gain is a profit realized from the sale of assets that are not inventories. These assets can be fixed assets such land, building, machinery, etc., financial assets like stocks, bonds,etc, and other non-inventory assets.

A capital gain tax rate is applied to the taxable gain to obtain capital gain tax payable.

From the question, the $825,000 taxable gain is the profit realized by Company PJ from selling the acres of undeveloped land after deducting its cost of purchase and other relevant allowable expenses and sales commission from the sales proceed of $1.3 million.

The purchase price, commission and other expenses is therefore equal to $475,000 (i.e. $1,300,000 - $825,000 = $475,000).

In summary, taxable gain is sales proceed minus purchase price, commission and other expenses. We can therefore have:

Taxable gain = $1,300,000 - $475,000 = $825,000.