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George is the owner of numerous classic automobiles. His intention is to hold the automobiles until they increase in value and then sell ous events (e.g., antiqu In 2017, he sold a classic automobile for $1.5 million. He had held the automobile for five years, and it had a tax basis of $750,000.
a. Was the automobile a capital asset? No. It is depreciable property used in a business.
b. Assuming a rate of return of 7%, how much would he have had to invest five years ago (instead of putting $750,000 into the car) to have had $1.5 million this year? The present value factor for 5 years at 7% is .7130.

Sagot :

Solution :

a). The capital asset that can be found as any type of property which is held by the assessee for a long period of time and it costs more than the useful day to day costs of operation, whether it is connected with the business or the profession of the assessee. It includes that all types of the properties which is movable, tangible, fixed or circulating.

The classic automobile sold by George in the year 2017 is considered not as a depreciable property which was being used in the business and had a determined a lifetime which was held for more than a year.

The depreciation property is any type of asset which is eligible for depreciation. The IRS Publication 96 requires a depreciable asset to meet the following requirements :

1. It must be any property that a person owns or possesses.

2. It is used for the business and the income of the producing activity.

3. It must have a determined useful life.

4. It is expected to last for more than a month.

b). The computation of the present value of the automobile :

Present value = future value x present value factor

PV = FV  x  PVF

      = 1500000 x 0.7130

      = $ 1,069,500

It is given that:

FV = $ 1,500,000

N = 5 years

The rate of return = 7%

So the PVF at N = 5 years and the rate of return = 7% is 0.7130

Thus, George should have invested his money for 5 year ago with a value of $ 1,039,5000 instead of putting $750,000 into a car.

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