Four years ago, Otto purchased farmland for $600,000 and spent an additional $40,000 on soil and water conservation which was deducted in the year of purchase. Otto has just sold the land for $900,000. How much of the $300,000 gain will be treated as ordinary income?

Question

Quizplus · Accepted Answer

The $40,000 spent on soil and water conservation was deducted as an expense, reducing the basis of the land. Upon sale, this amount is recaptured as ordinary income.

Four Years Ago, Otto Purchased Farmland for $600,000 and Spent