Question

Albert owns 100 acres of land on which he grows spruce Christmas trees. His adjusted basis for the land is $100,000. He receives condemnation proceeds of $10,000 when the city's new beltway takes 5 acres along the eastern boundary of his property. He also receives a severance award of $6,000 associated with the possible harmful effects of exhaust fumes on his Christmas trees. Albert invests the $16,000 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 for the remaining property is $_______.

Answer 1

Part A

Amount realized	10000
Adjusted basis (5 acres/100 acres) * 100000)	(5000)
Realized gain	5000
Recognized gain (because Albert didn’t acquire qualifying replacement property, the realized gain is also a recognized gain)	5000

Albert has a $5000 realized gain of which $5000 is recognized.

Part B

Adjusted basis of remaining land (100000 – 5000)	95000
Less: Severance award	(6000)
Adjusted basis	89000

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

His adjusted basis for the remaining property is $89000