Question

3. 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?

Answer 1

Solution :-

3 ) :-

Here we need to find out the Gain earned by A with respect to house .

Gain earned by A with respect to house = Realized Gain - Adjusted basis for purchase of house

Where,

Sale of house by A : Realized basis :-

Realized Gain = [ $600,000+ $300,000 + $12,000 ] - [ $30,000 + $10,000 ]

= $912,000- $40,000

= $872,000

Realized Gain = $872,000

Purchase of house by A :- Adjusted basis :-

Adjusted basis for purchase of house = [ $400,000 + $7,500 + $32,000 ] - [ $15,000 + $4,500 ]

= $439,500 - $19,500

= $420,000

Adjusted basis for purchase of house = $420,000

Finally ,

Gain earned by A with respect to house = $872,000 - $420,000

= $452,000

Gain earned by A with respect to house = $452,000

Gain earned by A with respect to house = $452,000