Question

Albert owns 100 acres of land on which he grows spruce trees. His adjusted basis for the land is $192,000. He receives condemnation proceeds of $19,200 when the city's new beltway takes 5 acres along the eastern boundary of his property. He also receives a severance award of $11,520 associated with the possible harmful effects of exhaust fumes on his trees. Albert invests the $30,720 in a growth mutual fund.

a. Determine the tax consequences to Albert of the condemnation proceeds.

Albert has a $______ realized gain  of which $_____ is recognized.

b. Determine the tax consequences to Albert of the severance award.

The severance award reduces  the basis of Albert's remaining property.

His adjusted basis in the remaining property is_______

Answer 1

Solution:

A)

Amount realized	$19,200
Les:Adjusted basis(5 acres/100 acres)*192,000	(9,600)
Realized gain	9,600
becuase Albert didn't acquire qualifying replacement property, the realized gain is also a recognized gain

Albert has a $9,600 realized gain of which is $9,600 is recognized

B)

Adjusted basis of remaining land(192,000 - 9,600)	182,400
Less: Severance award	(11,520)
Adjusted basis	170,880

The severance award reduces the basis of Albert's remaining property

His adjusted basis for the remaining property is $170,880

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