Module 6: Capital gains and losses - PD Net

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Course Schedule Course Modules Review and Practice Exam Preparation Resources Self-test 6 solution 5 Whether a gain or loss on the sale of property is an account of capital or income depends upon the following factors: Primary intent: The taxpayer’s primary reason for buying and later selling the property. In general, if the taxpayer intended to purchase the property, hold it as "inventory," and sell it for a profit, the proceeds would be treated as income. If the property was held with the intention of earning income from the investment, any gain on disposition would be likely deemed on account of capital. Secondary intent: The taxpayer’s "default plan" with respect to the investment is also considered. For example, if a taxpayer purchased some undeveloped land near a city, with the primary intention of using it as a private hunting preserve, but later subdivided the land and sold it as individual residential lots, the gains or losses would likely be considered as income. There is a strong indication that, although the land was purchased as an investment, there was an underlying intent to sell it as residential lots for a substantial profit. Number and frequency of transactions: Where the taxpayer has completed several similar transactions on a regularly occurring basis, any gains or losses would likely be deemed to be income, rather than capital. The transactions would likely be classified as "an adventure or concern in the nature of trade." Relationship to taxpayer’s regular business: Gains or losses arising from transactions that are similar to those transactions common in the taxpayer’s regular business would likely be treated as income instead of capital. For example, a capital gain earned on common shares by a stockbroker would likely be considered income. These factors must be considered together. It is the overall tendency, indicated by examining all relevant factors, that forms the basis for determining whether any gains or losses on the sale of property are on account of capital or income. file:///F|/Courses/2010-11/CGA/TX1/06course/m06selftestsol5.htm[11/10/2010 4:42:05 PM]
Course Schedule Course Modules Review and Practice Exam Preparation Resources Self-test 6 solution 6 While the land was assumed to be inventory to Mr. Fitzener, Zelda, unlike her husband, is not in the land development business. Her gain on selling the land will be treated as a capital gain. The ACB of the land is the deemed proceeds realized by her husband at death, which are indicated in the question to be her husband’s "cost amount" (inventory carrying value). file:///F|/Courses/2010-11/CGA/TX1/06course/m06selftestsol6.htm[11/10/2010 4:42:06 PM]
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Module 6: Capital gains and losses - PD Net

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