Leah acquired only one tract of land seven years ago as an investment. In order to sell the land at a higher price, she decides to subdivide it into 20 lots. She pays for improvements such as clearing and leveling, but the improvements are not considered to be substantial. Each lot has a basis of $20,000, and a selling price of $30,000. Selling expenses of $820 were incurred to sell four lots last year. This year, twelve lots are sold, and selling expenses amount to $2,100.

Requirement

How much ordinary income and capital gain must be recognized in the prior and current year?

First, calculate the total gain from the sale of lots in the prior year, and the allocation of that gain between ordinary income and a capital gain.