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the property she needed to be sure this property would serve her purposes. So she performed...

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Finance

the property she needed to be sure this property would serve herpurposes. So she performed market research and investigated theability to rezone the property. This was going to take about 8months to accomplish. To prevent anybody else from purchasing theproperty prior to completing her due diligence, she secured anoption on the property. The option cost her $25,000, but it gaveher the exclusive right to buy the property for the next 9 months.The option provides that Porky retains the $25,000 if the option isnot exercised. However, if it is exercised, the $25,000 becomespart of the $1,000,000 contract price of the real estate. Aftercompleting her due diligence, Jenny decides not to purchase theproperty. She allows the option to expire. What are the taxconsequences? Check as many as are correct.

1-Porky has $25,000 of ordinary income upon receipt of theoption money.

2-Porky has $25,000 ordinary income on the date the optionexpired.

3-Jenny has a $25,000 loss on the date she purchased theoption.

4-Jenny has a capital loss of $25,000 when the optionexpired.

5-None of the above.

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