Kareem's realized gain on the sale of the house, excluding the mortgage assumption, is $104,700, which is the difference between the selling price of $330,000 and the adjusted cost basis of $225,300. The original mortgage assumed by the buyer does not affect the calculation of the realized gain.
To calculate Kareem’s realized gain or loss on the sale of the rental house, we need to consider both the adjusted cost basis of the property and the selling price. The adjusted cost basis is the original purchase price plus improvements minus any depreciation claimed. In Kareem’s case, the adjusted cost basis is computed as follows:
- Original cost of the building: $250,000
- Cost of the tennis court: $7,500
- Total depreciation on the house: $30,900
- Total depreciation on the court: $1,300
Adjusted cost basis = $250,000 + $7,500 - $30,900 - $1,300 = $225,300
The selling price is $330,000. Therefore, the realized gain is the selling price minus the adjusted cost basis:
Realized gain = Selling Price - Adjusted Cost Basis = $330,000 - $225,300 = $104,700
When considering the original mortgage, the calculation does not change for the realized gain. However, it affects the amount of cash Kareem receives. If a buyer assumes the mortgage:
- Buyer pays cash: $330,000
- Mortgage assumed by buyer: $80,000
Total received = Cash + Mortgage assumed = $330,000 + $80,000 = $410,000
However, for the calculation of realized gain or loss, we consider only the selling price ($330,000) compared to the adjusted cost basis ($225,300), which remains unchanged at $104,700, as the mortgage is not part of this calculation.
The complete question is :
1 Kareem bought a rental house in March 2016 for $300,000, of which $50,000 is allocated to the land and $250,000 to the building. Early in 2018, he had a tennis court built in the backyard at a cost of $7,500. Kareem has deducted $30,900 for depreciation on the house and $1,300 for depreciation on the court. In January 2021, he sells the house and tennis court for $330,000 cash.
What is Kareem’s realized gain or loss? -$54,700 If an original mortgage of $80,000 is still outstanding and the buyer assumes the mortgage in addition to the cash payment, what is Kareem’s realized gain or loss?