Milestone #1- Capital gains & Tax consquences (1) - Memo Land disposition and tax consequences I Memo Section E Land Disposition According to IRC

Milestone #1- Capital gains & Tax consquences (1) - Memo...

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Memo Land disposition and tax consequencesI. Memo Section E- Land Disposition:According to IRC § 1221, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business). Section 1222 (1-4) defines other terms relating to capital gain and losses; such as, short- term capital gains or losses and long-term capital gain or losses. If a taxpayer sells or exchanges a capital asset that has been held for less than a year, when sold, the proceeds are considered short-term capital gains or losses. Whereas, capital assetsthat have been held for more than a year, when sold, are considered long-term capital gains or losses. Applying these rules to Bob, he has a capital asset that he had in his possession for over 50 years;when he sells his property it will result in a capital gain because the fair market value (FMV) hasappreciated over the years. Consider this:Bob sold his land that he bought in 1966, for $450,000, at fair market value which is 9 million dollars. Following the guidelines in IRC § 1012, for selling personal property, his capital gain and gross income from the sale of his land is calculated as follows. Amount realized:Cash: $ 9,000,000- selling expenses: $ 2,000,000(Incl. commissions, appraisals, & other fees)$ 7,000,000 Adjusted Basis:- Cost of Land:$ 450,000$ 6,550,000Long-Term Capital GainTax on long- termCapital gain: $ 1,310,000 @ 20% Medicare Tax:$ 248,900 @ 3.8%$1,558,900 Total long- term capital gains tax
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After-tax netProceeds:$4,940,100Based on the sale of his land, Bob has a capital gain of $6.55 million dollars which increased his
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