Taxation Law

Taxation Law

Question Number 1

Advise Smith as to the tax consequences of his actions.

Smith bought the land in 1986, and selling the same property after a period of 25 years includes a number of tax consequences that have to be kept in mind. It is eminent to mention here that the client would be advised in accordance with the Capital Gain Tax, which is basically a tax on the capital gains and implies that additional test would be implemented on the sale of some non-inventory assets, which were previously purchased on a comparatively lower price. This implies that the property, which was purchases at lower prices, would be subjected to additional taxes, which are not implemented on other assets and sales.

As Smith purchased the land in 1986 and is planning to sell the same in 2011, considerable differences can be observed in the rice of the property at the time of purchase and the time of sales. At the time of purchase, the price of the property was $600000, and after using juts 2 hectors out of the 30 hectors that he originally bought, he is now planning to sell the rest of the 28 hectors for $10 million. Although the tax is calculated as a part of the income tax, it is basically implied on the capital gain and the selling of assets is counted as the most common form of gaining assets. Thus, Smith would have to pay the additional taxes, which would be in accordance with the price of sale of the asset and not according to the price at which it was purchased. .

Thus, in case4 Smith decides to sell the property, he would have to bear the capital gain tax and thus a part of the income would be spent on the taxes, which have to be paid and fall under category of income tax. It is eminent to mention here that there are no methods of averting he tax or getting away from it, and despite of the fact that the increase in price of the property is due to the additional work done on the property, including the development and the subdivision, the income tax would be applied on the overall selling price (Avi- Yonah, Saratori and Marian, 2011). Thus, the amount of tax would be significantly high and might cause Smith to lose a part of his profit as well, as he has spent significant amount of money in an attempt to develop the land. In order to cope with the issue, I would inform Smith to think of come other use of the land or be mentally prepared for the loss in the form of tax, as the Capital gain tax would be imposed on the land and the client would have to bear with the same. Moreover, I would advise Smith to either sell the land in bits, in different periods of time, to make sure that small bits of taxes are applied and the client does not have to ...