Question

Bennett purchased a tract of land for $20,000 in 2012 when he heard that a new highway was going to be constructed through the property and the land would soon be worth $200,000. The highway project was abandoned in 2018 and the value of the land fell to $15,000. Bennett can claim a loss in 2018 of:

Answer 1

Bennett can claim a loss of $5,000 in 2018, which is the difference between the purchase price of $20,000 and the decreased value of $15,000. Other examples given, such as Freda and Ben, demonstrate changes in property values that resulted in gains.

Step-by-step explanation:

Bennett purchased land for $20,000 and later its value decreased to $15,000 when a highway project was abandoned. In 2018, Bennett can claim a loss of $5,000, which is the difference between the original purchase price and the decreased value. It is important to note that unrealized gains or what the land could have been worth ($200,000 in this case) do not factor into the calculation of the actual loss claimed. The loss is calculated based on the actual amount paid and the actual value at the time of the claim.

Freda and Ben provide examples of real estate transactions where the property value increased, unlike Bennett's situation. Freda's house increased in value from $150,000 to $250,000, and Ben's house increased from $100,000 to $160,000, with him having paid down $20,000 of his bank loan. These examples illustrate varying outcomes of real estate investments which can result in gains or losses due to changes in property value.