Exciting Investment Opportunity with Olivia!
What did Olivia do with the vacant land for investment purposes?
Olivia paid $35,400 for the option to buy the land for $708,000 anytime in the next four years. Fourteen months later, she sold the option for $44,250. What is the amount and character of Olivia's gain or loss?
Olivia's Profitable Move:
Olivia paid $35,400 for the option to buy the land for $708,000 anytime in the next four years. This means she essentially locked in a purchase price for the land. Fourteen months later, she sold the option for $44,250. This means she made a profit of $8,850 ($44,250 - $35,400).
Olivia saw a great investment opportunity with the vacant land and took a smart financial move. By purchasing the option for a future buy with a locked price, Olivia secured her position in the potential appreciation of the land value.
The $8,850 profit Olivia made from selling the option is considered a short-term capital gain since the option was held for less than one year. This gain will be taxed based on Olivia's overall income and tax bracket.
If Olivia had decided to exercise the option and purchase the land, any gain or loss from the eventual sale of the land would also be categorized as a capital gain or loss. However, in this case, Olivia's profit was solely from the sale of the option itself.