Final answer:
The $10,000 painting expenses would increase the seller’s adjusted basis but not affect the amount realized. Adjusted basis includes the original purchase price and any capital improvements made on the property.
Step-by-step explanation:
For the scenario described, the effect of $10,000 painting expenses on the seller’s amount realized and adjusted basis would be that the painting expenses increase the seller’s adjusted basis. This is due to the fact that capital improvements like painting increase the cost basis of a property. They do not, however, affect the amount realized directly. The amount realized is the gross amount the seller receives from the sale before subtracting any selling expenses or the adjusted basis.
When Freda bought a house for $150,000 and it appreciated to $250,000, that increased market value represents a potential capital gain upon sale, but the adjusted basis would remain at the original purchase price unless improvements were made. Similarly, for Ben, who bought his house for $100,000, with a value now at $160,000, his equity has increased due to both the appreciation in property value and the principal payments made on the mortgage, while his adjusted basis would remain at the purchase price plus any capital improvements.