Claude purchased raw land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Claude intended to treat this property as inventory, like his other development properties. Before completing the development of the property, however, he decided to contribute it to South Peak Investors LLC when it was worth $2,500,000, in exchange for a 10 percent capital and profits interest. South Peak's strategy is to hold land for investment purposes only and then sell it later at a gain.
a. If South Peak sells the property for $3,000,000 four years after Claude's contribution, how much gain or loss is recognized and what is its character?
b. If South Peak sells the property for $3,000,000 five and one-half years after Claude's contribution, how much gain or loss is recognized and what is its character?