George is the owner of numerous classic automobiles. His intention is to hold the automobiles until they increase in value and then sell them. He rents the automobiles for use in various events (e.g., antique automobile shows) while he is holding them.
In 2017, he sold a classic automobile for $1.5 million. He had held the automobile for five years, and it had a tax basis of $750,000.
a. Was the automobile a capital asset?
b. Assuming a rate of return of 7%, how much would he have had to invest five years ago (instead of putting $750,000 into the car) to have had $1.5 million this year? The present value factor for 5 years at 7% is .7130.
a) Since the intention of George is to hold the automobiles till they increase in value and sell them, he is not using them for trading purpose/as goods but looking for capital gains on those assets, they will be considered as a CAPITAL ASSET.
b) We have
Present value = 1.5 million
Future value = ?
I/Y = 7%
N= 5 years
By putting them in the formula Future value = Present value* (1+r)n
= $1.5 million* 0.7130