Tax Research

Research Problem #2

The land is not depreciable, but should be listed as a separate component of the sale. Land is a capital asset and the gains on the sale of the land should be capital, as long as Walter did not or was not going to improve anything on it. But since it says that he was holding it for future development, I don’t think that applies. I guess we need a little more information on this.

Real property creates a capital gain or loss on the sale or exchange as long as it is a capital asset. Reasons that real property can be excluded from the capital asset category are that it’s property held by the taxpayer primarily for sale to customers in the ordinary course of business (Code Section 1221(a)), and that it’s real property used in his business (Code Section 1221(b)). The sale or exchange of real property used in business that is a capital asset can create a Code Section 1231 gain or loss. In this case that real property is help for sale to customers in the ordinary course of a taxpayer’s business keeps it from being either a capital asset or a Code Section 1231 asset. Cases decided under Code Section 1231 are covered as part of the question of what property is used in a business. There are special rules in Code Section 1237, that allow taxpayers besides C corporations to get limited capital gain as to property subdivided for sale under certain circumstances.

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