Question 1
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?
◦ $0
◦ $24,000
◦ $40,000
◦ $300,000
Question 2
Heather purchased undeveloped land to drill for oil and gas. She spent $800,000 on intangible drilling costs during the year of purchase, which she elected to immediately deduct. During the three years of the well's operation, Heather deducted $1.2 million of cost depletion. Heather has sold the property for a $3 million gain. The gain will be treated as
◦ $3 million Sec. 1231 gain.
◦ $3 million ordinary gain
◦ $2 million ordinary income and $1 million Sec. 1231 gain.
◦ $1.2 million ordinary income and $1.8 million Sec. 1231 gain.
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