A acquires a house for $400,000 and incurs $7,500 of various closing fees. A als

Question

A acquires a house for $400,000 and incurs $7,500 of various closing fees. A also paid $3,000 of the sellers real estate taxes which was part of the $400,000 purchase price. While A owned the house A built a swimming pool for a cost of $32,000 but deducted $15,000 as a medical expense, A deducted $9,000 of expenses as a home office deduction of which $4,500 was for depreciation. A sells his home to B on October 1, 2016. A receives $600,000 in cash and B assumes A’s mortgage of $300,000. B will pay the entire year’s real estate tax of $12,000 in addition to the $300,000 purchase price. The broker’s commission on the sale is $30,000. B is obtaining financing and to help B, A will pay points to the lender of $10,000.What is A’s basis in the house, what is the amount realized by A on the sale and what is A’s gain or loss with respect to the house?

Explanation / Answer

ANSWER:

Sale of House by A : Realized Basis

Realised gain = Amount realised from sale + Mortagage debt + Real estate tax - Broker's Commission - Points paid by the Seller

= $6,00,000 + $3,00,000 + $12,000 - $30,000 - $10,000

= $8,72,000

Purchase of house by A: - Adjusted Basis

Adjusted basis for purchase of house = Acquistion of house + Closing Fees + Construction of Swimming pool - Medical Expenses - Depreciation deducted on home office

= $4,00,000 + $7,500 + $32,000 - $15,000 - $4,500

= $4,20,000

Gain earned by A with respect to house = $8,72,000 - $4,20,000 = $4,52,000

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