Spencer has an investment in two parcels of vacant land. Parcel 1 is a capital asset and parcel 2 is a § 1231 asset. Spencer already has short-term capital loss for the year he would like to offset with capital gain. Spencer has § 1231 lookback loss that exceeds the gain from the disposition of either land parcel. Spencer only wants to sell one land parcel and each of them would yield the same

Question

amount of gain. The gain that would be recognized exceeds the short-term capital loss Spencer already has. Which of the statements below is correct?
a. Spencer will have a net capital loss no matter which land parcel he sells.
b. Spencer will have a net capital loss if he sells parcel 2.
c. Spencer will have a net capital loss if he sells parcel 1.
d. Spencer will have a net capital gain if he sells either parcel 1 or parcel 2.
e. None of the above.

Answer 1

b
RATIONALE: Since parcel 2 is a § 1231 asset, its gain will be treated as ordinary income due to the § 1231 lookback and none of the gain will be treated as long-term capital gain. Thus, the existing short-term capital loss will not be offset by any gain and a net capital loss will result. Selling parcel 1 will yield a capital gain that will more than offset the existing short-term capital loss, resulting in a net capital gain.