Pete works for a real estate company. The company recently acquired a plot of land for $50,000. Pete asked his boss if he could purchase it. The boss said "Pete you are a great employee. You have earned this land. I'll let you have it for $30,000." What happens to the $20,000 discount?

Nothing. This is a gift from his employer. It is excluded from income. Pete's basis in the land remains $30,000.

The $20,000 will be included on Pete's return as wages (ordinary income). It also increases Pete's basis in the land to $50,000.

The $20,000 will be included on Pete's return as a capital gain. It also increases Pete's basis in the land to $50,000.