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Unformatted text preview: Thus Mr. Rhodes would realize the following capital gain: Total Capital Gain $1,750,000 Reserve ( 1,312,500 ) Capital Gain $ 437,500 Taxable Capital Gain (1/2) $ 218,750 In the Second Year: Mr. Rhodes must add the previous year’s reserve into his income as capital gain and calculate a reserve: Previous Reserve $1,312,500 Maximum New Reserve: (20%)($1,750,000)(4 – 1) ( 1,050,000 ) Capital Gain $ 262,500 Taxable Capital Gain $ 131,250 In each of the next three years, Mr. Rhodes must include the previous year’s reserve into income as capital gain and calculate a new reserve. By the fourth year after the sale, he will include the previous year’s reserve, but the formula [(20%)($1,750,000)(4 – 4)] will result in no reduction in taxable capital gains and no amounts to carry forward, even though the developer may still be paying Mr. Rhodes for the land....
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- Spring '11