Bussy Morgan is a real estate agent for Coastal Estates, a residential real esta

Question

Bussy Morgan is a real estate agent for Coastal Estates, a residential real estate development. Because of his outstanding sales performance, Buddy is permitted to buy a lot for $300,00 that normally would sell for $500,000. Buddy is the only real estate agent for Coastal Estates who is permitted to do so.

a. Does Buddy have gross income from the transaction? Explain.

b. What is Buddy's adjusted basis for the land?

c. Write a letter to Buddy informing him of the tax consequenses of his acquisition of the lot. His address is 100 Tower Road, San Diego, CA 92182.

Explanation / Answer

Part A)

Yes, Buddy has gross income from the transaction. It will be treated as a "Bargain Purchase Transaction". The difference of $200,000 (500,000 - 300,000) between the purchase price and the fair market value of the property will get treated as a compensation for services performed by Buddy or a form of dividend. This amount of $200,000 will be included in the gross income of Buddy for the relevant tax year.

________

Part 2)

The adjusted basis of land for Buddy would be equal to the fair market value. Therefore, in the given case, $500,000 will be considered as the adjusted basis for the land.

________

Part 3)

To

Mr. Buddy Morgan,

100 Tower Road, San Diego,

CA 92182

------------

This in regards to the tax consequences of the acquisition of the land done by you. The opportunity to buy the property was given to you on the basis of your outstanding performance. You were the only real estate agent who was allowed to do so. In reference to this transaction, you are required to report the difference of $200,000 (FMV - Purchase Price) in your gross income for the year. It is so because, if the basis of the land were not adjusted (increased) with the value of difference, you would again be liable to tax at the time of disposition of the property. The adjusted basis of the land will be $500,000.

Please feel free to contact for any further details you require in regards to the matter discussed above.

Regards

XYZ

(Accountant)

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