Maximizing Luke's Gain: Analyzing Building and Land Sale

a. What is the amount and character of Luke's recognized gain or loss on the building?

1. $147,500 recognized gain

b. What is the amount and character of Luke's recognized gain or loss on the land?

1. $49,000 recognized gain

Answer:

a. Luke has a recognized gain of $147,500 on the building. The character of the gain is dependent on how long Luke held the building.

b. Luke has a recognized gain of $49,000 on the land. Similar to the building, the character of the gain is determined by the duration of Luke's ownership of the land.

When analyzing Luke's recognized gain on the building and land sale, it's essential to understand the basis of calculation and the character of the gains. Let's delve into the details:

a. Recognized Gain on the Building:

To determine Luke's recognized gain on the building, we compare the fair market value (FMV) with the adjusted basis. The adjusted basis is calculated by subtracting the accumulated depreciation from the original cost ($325,000 - $65,000 = $260,000). Since the FMV ($407,500) exceeds the adjusted basis, Luke recognizes a gain of $147,500 on the building.

The character of the gain, whether long-term or short-term, hinges on the duration of Luke's ownership. Long-term gains typically receive preferential tax treatment compared to short-term gains.

b. Recognized Gain on the Land:

Similarly, to ascertain Luke's recognized gain on the land, we juxtapose the FMV with the original cost of the land. With the FMV ($226,000) surpassing the original cost ($177,000), Luke realizes a gain of $49,000 on the land.

Just like with the building, the character of the gain on the land is influenced by the holding period. Long-term gains are generally taxed at a lower rate than short-term gains, highlighting the importance of this distinction.