Explanation: Solution
1. Land basis = $40,000
Condemnation proceeds = $15,000
Thus, there is a loss of $25,000 as per loss of § 1231.
2. Under §1245, when the recomputed basis or realized amount, whichever is lower, is more than the adjusted basis of the property, gain is treated as ordinary income. Thus, under §1245, the gain of $3,500 is considered as an ordinary income.
3. Under §1245, the recomputed basis or realized amount, whichever is lower, is more than the adjusted basis of the property, gain is treated as ordinary income. Therefore, gain of $4,900 is considered as ordinary income.
4. As per §1231 gain of $175,217, ($300,000 – $124,783 = $175,217)
5. Before any AGI deductions, there is tax loss of $7,000, which is treated as personal casualty loss.
6. Loss = $20,800 – $9,600 = $11,200.
This loss is considered as personal loss, which is non-deductible.
7. In this case, $6,000 is the tax loss, which is treated as casualty loss of business.
8. Larry’s AGI = $102,000
Since he has no look-back losses, only current year losses will be considered.
Section 1231 loss is treated as an ordinary loss, which is fully deductible. In any tax year, capital loss is deductible up to $3,000.
So, Larry’s AGI = $102,000 + $3500 + $4900 + $175217 = $285,617
Less: losses = $25,000 (loss as per Section 1231) + $3,000 (out of $7,000 of personal casualty loss) + $3,000 (out of $11,200 personal loss) = $31,000
Hence, Larry’s personal AGI is $285,617 – $31,000 = $254,617.
