Question

Consider the following two scenarios. A taxpayer acquires a rental property in April 2019 for $1 million (the same case as the depreciation assignment; $800,000 assigned to building; 27.5year depreciation) and sells it for $1.5 million either on:

(a) December 31, 2019 or on

(b) December 31, 2020

1. What is the gain on sale? Remember to add back the value of the land when calculating the gain. Show calculations. You will need the correct solutions to the Depreciation1 assignment (please see posted solution under Course Documents available after you submit Depreciation1).

Scenario 1: sale on 12/31/19

Scenario 2: sale on 12/31/20

2. What kind of gain is this? Ordinary or Capital? Explain why

Scenario 1

Scenario 2

3. Based on your answers above, calculate the tax owed on the gain.

Scenario 1

Scenario 2

Answer 1

1. In the scenario, when sold on 12/31/2019; Here purchase of property is on April 2019 for a sum of $1.5M. Since the property was sold in the above said date, gain on sale would be calculated as follows: In this case property was sold within a year (8 months) from the date of purchase. Therefore, it is considered as short term capital gain. Enclosed excel calculations.

In the 2nd scenario, when sold on 12/31/2020: In this case, property was sold after 1 year (1 year & 8 months) from the date of acquisition. It is also considered as short term capital gain, because any property that is acquired & sold more than 2 years is considered as long term capital gain. In this scenario, Property was sold exactly for 1 year from the date of purchase.

2. Both the scenarios are considered as capital gains because, the gain has aroused from the sale of property. Property is a capital asset.

3. Tax paid on the Gains: Capital gains as per analyses is 5,00,000 INR

Tax slab is @ the rate of 30%, which is = 5,00,000*30% = 1,50,000 INR.

Therefore tax liability on the gains in both the scenarios is = 1,50,000 INR