Identify Tax Issues
Tax Issues in the Scenarios:
Scenario 1: Victoria and Stock Sale for Tuition
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Capital Gains Tax: Selling the stock will likely result in a capital gain for Victoria. Since she bought the stock for $2,000 and is selling it for $5,000, she has a capital gain of $3,000 ($5,000 - $2,000). Depending on how long she held the stock, this gain may be taxed at the short-term capital gains rate (ordinary income tax rate) or the long-term capital gains rate (typically lower than ordinary income tax rate).
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Gift Tax Implications (Potential): While using the capital gains proceeds to pay for her son's tuition might seem straightforward, there could be gift tax implications if the amount exceeds the annual gift tax exclusion. Currently, the annual gift tax exclusion is $16,000 per person per year (as of May 2024). If the tuition payment is more than $16,000, Victoria might need to file a gift tax return, although she may not necessarily owe any gift tax depending on the total value of her gifts throughout the year.
Scenario 2: Lester Partnership and Land Purchase
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Allocation of Purchase Price: The Lester Partnership will need to determine how to allocate the $260,000 purchase price for tax purposes. Since they only wanted the land, but had to buy the buildings and farmhouse as well, they'll need to allocate a portion of the purchase price to the land, buildings, and farmhouse based on their fair market values. This allocation will impact their depreciation deductions for the buildings and potential demolition and sale of scrap lumber.
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Demolition Costs and Scrap Sale: The $20,000 paid for demolition can be deducted as an expense in the year it was paid. However, the proceeds from selling the scrap lumber for $12,000 will reduce the amount of demolition expense they can deduct. This is because the sale represents a salvage value of the demolished buildings.