Olivia's Land Investment Decision: Gain or Loss?
Understanding Olivia's Land Investment Decision
Olivia's Investment Strategy: Olivia's decision to purchase an option on vacant land for investment purposes demonstrates her willingness to take risks in order to potentially generate a profit in the future. By paying $36,500 for the option to buy the land for $730,000 within the next four years, Olivia secured the opportunity to benefit from any increase in the land's value over that period.
Calculating Olivia's Gain or Loss:
Olivia's gain or loss from this investment can be calculated by comparing the amount she initially paid for the option with the amount she received when selling it. In this case, Olivia's initial investment was $36,500, and she sold the option for $45,625 after fourteen months.
Gain/Loss = Selling Price - Initial Investment
Gain/Loss = $45,625 - $36,500 = $9,125
Interpreting Olivia's Gain:
Olivia's gain of $9,125 is considered a capital gain because it resulted from the sale of an investment asset. Capital gains are typically subject to different tax rates than ordinary income, and the specific tax treatment of Olivia's gain would depend on various factors, such as the holding period of the investment.
Overall, Olivia's land investment decision yielded a positive return, demonstrating the potential rewards of strategic investment choices.