Advise Emma of the capital gain tax (CGT) consequences of her transitions. Ignore indexation

Question

Emma has provided to you a listing of the transactions she has undertaken throughout the financial year to assist you in completing her 2015 income tax return. Sale of a block of land for $1,000,000: Emma purchased the land as an investment in 1991. The purchase price was $250,000, plus $5,000 in stamp duty, $10,000 in legal fees. To fund the purchase, she took out a loan on which she paid interest totalling $32,000. During the period of ownership her council rates, water rates and insurance totalled $22,000. In January 2005 a dispute occurred with a neighbour over the use of the land and legal fees incurred amounted to $5,000 in resolving this dispute. Before putting the property on the market $27,500 was spent to remove a number of large dangerous pine trees that were on the land. Advertising, legal fees and agent’s fees on the sale of the land were $25,000. Sale of Emma’s 1000 shares in Rio Tinto for $50.85 per share: Emma paid brokerage fee of 2% on the sale. Emma initially purchased the shares for $3.5 per share in 1982. Sale of a stamp collection Emma had purchased, from a private collector, in January 2015 for $60,000: Emma sold the collection at auction for $50,000. Auction fees totalled $5,000 for the sale. Sale of a grand piano for $30,000: It was initially bought for $80,000 in 2000. HI6028 Taxation Theory, Practice and Law Individual Assignment T2.2019 5 Advise Emma of the capital gain tax (CGT) consequences of her transitions. Ignore indexation. Your answer must include references to relevant tax law and or cases.

Answer 1

Hi Emma,

2015 tax return:

Block of Land-- sold $1,000,000, purchased in 1991 for $250,000. Add $10,000 legal fee and $5,000 stamp fee to cost of purchase. The $25,000 cost of sale is also added to the basis, which will make your adjusted basis $240,000. Long-term capital gain will be $711,000.

The $32,000 interest is investment interest is best if you can itemize on Schedule A. If you are a "qualified real estate professional", meaning that you spent at least 750 hours in real estate activity during the year, you can deduct the interest expense on Schedule C (self-employed).

Council, water and insurance rates totaling $22,000 will be fully deductible if you are a qualified real estate professional as described in the previous paragraph. If not, then it will be investment property maintenance fees on Schedule A (attach statement). The amount of deductibility of the $27,000 dangerous tree removal is up for discretion. if it was done close to the sale of the land, it could be added to the cost basis. if not, then it will be an schedule A maintenance expense or direct expense if you are a qualified real estate professional.

1000 sh. Rio Tinto Stock paid $3500 in 1982, Sold for $50,850. Cost of sale $1,017 = taxable LT gain $46,333.

Stamp Collection -- Purchased in 2015 for $60,000; sold in 2015 for $50,000 plus auction fees $5,000 = $15,000 short term loss; only $3,000 of it is allowed in 2015. The rest is carried over to future years until used up.

Grand Piano --- bought in 2000 for $80,000, sold in 2015 for $30,000. If personal property, no loss is allowed. if not, then same rules apply as in the stamp collection.

Long term capital gains have a lower tax rate than short term capital gains.

Reference IRC Title 26, Subchapter O, sec 1001-1002 (a) thru (c).