Question

2.         Maggie purchased a parcel of raw land from Carol on March 8, 20X1, for $200K, paying $50K cash to Carol and assuming a $150K mortgage.  Maggie purchased the property as an investment.  On January 2, 20X2, Maggie took a second mortgage on the land in the amount of $25K.  On March 8, 20X2, Maggie sells the land to Beth for $225K, assumption of both mortgages and a motorhome with FMV of $15K.

a.         What is Maggie’s basis in the raw land upon its purchase?

                         

b.        What is Maggie’s amount realized from the sale of the land to Beth?

            

            

c.          What type of and how much is Maggie’s gain/loss from the sale of the land to Beth?

d.         Would your answer to “c” above change if Maggie used the $25K from the second mortgage to pay for development plans for the land and to get the City’s approval of the development of the land (such expenses are considered improvements)?  If so, what would be Maggie’s g/l and its character?  

Answer 1

Answer: a.

Maggie’s basis in the raw land upon its purchase is $200K, as it is the cost of raw land whether it is paid in cash or by assuming mortgage.

Answer: b.

Maggie’s amount realized from the sale of the land to Beth is $35K ($225-$150-$25-$15). However this is not the gain or loss.       

Answer: c.

Type of gain/loss is short term capital gain as it has holding period of land is one year (from March 9, 20X1 to Marc 8, 20X2) and amount of gain is $25 ($225-$200).

Answer: d.

If Maggie’s used the second mortgaged for development plans then cost basis is $225K ($200+$25) as cost of improvement is part of cost basis and in that case there are no gain/loss to Maggie on sale of land to Beth.