Reference no: EM133079021

Question - ABC Corporation owned a rental property with an adjusted basis of $ 300,000 and a fair market value of $1,000,000 in 2017. ABC had acquired this property in 2007, rented it out, and performed all activities related to its rental. ABC sold an option to Joe to purchase this property any time in the next five years for $1,000,000. The option was priced at $100,000. Upon purchase of the property, Joe intended to rent it out and perform all rental activities himself. In 2018, due to a decline in the real estate market, the fair market value of the property was only $800,000. Joe sold the option to Sue, who was hopeful the market would recover soon, for $30,000.

In the following scenarios, please make the required determinations.

A. Determine the amount and character of the gain to ABC Corporation on the sale of the option to Joe.

B. Determine the amount and character of the gain or loss on the sale of option by Joe to Sue.

C. Assume that by 2020, the real estate market had a remarkable improvement, and the fair market value of the property increased to $1,500,000. Sue promptly exercised her option and purchased the property for $1,000,000. At the time of sale, ABC Corporation had an adjusted basis in the property of $ 250,000. Determine the amount and character of gains or losses to ABC and Sue, and the basis of the property in Sue's hand.

D. Assume instead that the real estate market continued to decline, and Sue allowed the option to expire in 2020 when the fair market value of the property was only $400,000 (ABC's adjusted basis was $250,000). Determine the amount and character of gains and losses to ABC and Sue.

E. Would your answer be any different in part D if the property subject to the option was the stock of XYZ Corporation, a wholly-owned subsidiary of ABC Corporation?