Section 1237 of the Code

[christineco]

Massachusetts. When section 1237(b) applies and one's basis is subtracted from selling price, is the remainder treated as ordinary income or only 5 percent charged to ordinary income? I"m talking about a capital gain property and I think afetr the basis is subtracted, this amount is a capital gain and 5 percent of this is charged to ordinary income only. the remainder remains a capital gain.

 

[LdiJ]

Massachusetts. When section 1237(b) applies and one's basis is subtracted from selling price, is the remainder treated as ordinary income or only 5 percent charged to ordinary income? I"m talking about a capital gain property and I think afetr the basis is subtracted, this amount is a capital gain and 5 percent of this is charged to ordinary income only. the remainder remains a capital gain.

Only 5% is charged to ordinary income. The remainder is a capital gain. However this only kicks in if you have already sold 5 lots. Otherwise it would be purely a capital gain (assuming that you meet the other standards in the section).

 

[christineco]

section 1237

Thank you LdiJ. I need more info. Significant improvements were made to the property so 1237 (a) does not apply. Does this mean that 1237(b) can't apply too? Because even though 10 acres of land were held , with a basis of $30,000 and (held for 10 years), they were subdivided into 30 residential lots, adding roads and improvements at a cost of $100,000, and then all 30 lots were sold for $25,000 each at the same time. Does this mean that 1237 (a) or (b) don't apply and the whole $750,000 selling price less basis of $130,000=$620,000 is long term capital gain property of which 15 percent will have to be paid in capital gain tax.

 

[LdiJ]

Thank you LdiJ. I need more info. Significant improvements were made to the property so 1237 (a) does not apply. Does this mean that 1237(b) can't apply too? Because even though 10 acres of land were held , with a basis of $30,000 and (held for 10 years), they were subdivided into 30 residential lots, adding roads and improvements at a cost of $100,000, and then all 30 lots were sold for $25,000 each at the same time. Does this mean that 1237 (a) or (b) don't apply and the whole $750,000 selling price less basis of $130,000=$620,000 is long term capital gain property of which 15 percent will have to be paid in capital gain tax.

It appears that the entire section doesn't apply to you. However, it also appears that you were very much engaged in a "trade or business" in this endeavor also. Therefore I am not certain that you can treat this as capital gains either. It would appear to me that it needs to be treated as ordinary business income.

You need to retain the services of an accountant. There is too much money involved here to rely on the advice from a message board.

 

[christineco]

Thank You Ldij!