Luke sold a building and the land on which the building sits to his wholly owned

Question

Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp. at fair market value. The fair market value of the building was determined to be $365,000; Luke built the building several years ago at a cost of $307,500. Luke had claimed $76,500 of depreciation expense on the building. The fair market value of the land was determined to be $227,000 at the time of the sale; Luke purchased the land many years ago for $177,750.

a. What is the amount and character of Luke’s recognized gain or loss on the building?

b. What is the amount and character of Luke’s recognized gain or loss on the land?

Explanation / Answer

A. Amount and Character of Luke's recognized on gain or loss on the building

Fair market value of building $365,000

Less: cost of Building $307,500

Less: Depreciation expense on building ($76,500) $231,000

Gain on sale of Building $134,000

Building is depreciable asset, therefore, the benefit of depreciation is allowed

B. Amount and Character of Luke's recognized on gain or loss on the Land

Fair market value of Land $227,000

  Less: cost of Land ($177,750)

Gain on sale of Land $49,250

Land is not a depreciable asset, therefore, the benefit of depreciation is not allowed

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