A real estate developer purchases land for $500,000, constructs a building for $1,200,000, and sells the completed project for $2,100,000. Assuming this is considered business income rather than capital gains, what amount is subject to income tax?
Correct Answer
C) $400,000
Business income is the full profit: $2,100,000 - $500,000 land - $1,200,000 construction = $400,000. Because it is business income rather than a capital gain, the whole $400,000 is included in income instead of one-half of it.
Why This Is the Correct Answer
Sale price $2,100,000 minus total costs of $1,700,000 ($500,000 land + $1,200,000 construction) equals a $400,000 profit. Business income is included in full, so $400,000 is subject to income tax.
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