1 Discuss whether the sale of Mr Singhs flat will result in a capital or revenue receipt....
Question:
1 Discuss whether the sale of Mr Singh’s flat will result in a capital or revenue receipt. (12 marks)
INFORMATION
Mr Singh is an avid reader of financial journals. Ten years ago while reading one of these journal he came across an article that stated that approval for a major commercial development was in the process of being granted by the Cape Town city council. This development was in Salt River, one of the suburbs close to the city centre. It was suggested in the article that once completed, this development would cause a significant increase in property prices in Salt River. The project was expected to be completed within two years of approval. Mr Singh had been quite a prudent saver and had built up a good deposit. Within 6 months of reading the article he had purchased a flat in Salt River for R320 000. He decided that rather than let the flat stand empty while he waited to resell the flat at a profit, he would earn rental income while he could. In November 2009 he leased out the flat to a tenant for a monthly rent of R8 000 subject to a 10% annual increase.
By June 2012 the commercial development had been completed and Mr Singh’s flat value had increased to R1 100 000. As he was earning such a good rental on his flat , Mr Singh decided not to sell the flat at this time. In October 2012 he spent approximately R120 000 on a major upgrade of the flat and managed to get a new tenant for R18 000 a month.
In August 2018 Mr Singh was forced to sell flat as he had been hospitalized for a serious illness and needed approximately R900 000 to settle his medical expenses. He sold the flat for R1 300 000.
Microeconomics Principles, Problems and Policies
ISBN: 978-1259450242
20th edition
Authors: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn