Itemized Deductions (LO. 4) Rocco owns a piece of land as investment property. H
ID: 2423203 • Letter: I
Question
Itemized Deductions (LO. 4) Rocco owns a piece of land as investment property. He acquired the land in 1992 for $18,000. On June 1, 2015, he sells the land for $80,000. As part of the sale, the buyer agrees to pay all of the property taxes ($3,600) for the year. Do not round any division. Round other computations to the nearest whole dollar. What is Rocco's gain on the sale of the land? (Assume 365 days in the year). With the buyer paying the real estate tax, the sale price is by the Rocco owned the property for days. Calculate the real estate liability allocation and then determine Rocco's gain on the sale: $ What amount of the property taxes can Rocco deduct? What amount can the buyer deduct? (Assume 365 days in the year). Rocco is only allowed to deduct the taxes when he owned the land (which was days). His allowable deduction for property taxes is $. The buyer's allowable deduction is $ What is the buyer's basis in the land? $.Explanation / Answer
Solution:
a. What is Rocco’s gain on the sale of the land? Because the buyer paid the real estate tax, the sale price is increased by the amount of Rocco’s share of the real estate tax liability assumed by the buyer of the land. The allocation of the real estate taxes is based on the number of days Rocco owned the property during the year (151 days from January 1 to May 31), resulting in the buyer effectively paying Rocco an additional $1,489 [$3,600 x (151 ÷ 365)] for the land. The sales price of the land, after adjustment for the real estate tax, is $81,489 ($80,000 + $1,489) Rocco has a gain of $63,489 on the sale of the land: Amount realized ($80,000 + $1,489) $81,489 Adjusted basis -18,000 Gain on sale $63,489 b. What amount of the property taxes can Rocco deduct? What amount can the buyer deduct? Rocco is only allowed to deduct the taxes paid for the portion of the year he owned the land. This allocation is based on the number of days he owned the property during the year (151 days from January 1 to May 31), resulting in a deduction of $1,489 [$3,600 x (151 ÷ 365)]. Likewise, the buyer is only allowed to deduct the taxes for the portion of the year (June 1 to December 31). The buyer can deduct $2,111 ($3,600 - $1,489) of property taxes. c. What is the buyer’s basis in the land? The buyer is allowed to increase their basis in the land by the amount of real estate taxes paid on behalf of the seller. Therefore, their basis in the land is $81,489 ($80,000 + $1,489). Note: Although technically, the allocation is based on the number of days, using 5 months results in approximately the same deduction $1,500 [$3,600 x (7 ÷ 12)]. The $11 difference ($1,500 - $1,489) is due to rounding.Related Questions
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