To determine the income Alexa Watson should report for 20X1 in connection with the land, we need to calculate the unrealized gain or loss on the land as of December 31, 20X1.
The unrealized gain or loss is the difference between the fair market value of the land and its cost basis.
Given:
- Cost basis of the land = $450,000
- Fair market value of the land = $900,000
Unrealized gain = Fair market value - Cost basis
= $900,000 - $450,000
= $450,000
So, Alexa Watson has an unrealized gain of $450,000 as of December 31, 20X1. However, for tax purposes, unrealized gains are not recognized until the property is sold.
Therefore, for 20X1, Alexa Watson does not report any income in connection with this land. She will only report income if and when she sells the land and realizes the gain.
