Question

Peyton sells an office building and the associated land on May 1, 2019. Under the terms of the sales contract, Peyton is to receive $1,600,000 in cash. The purchaser is to assume Peyton's mortgage of $950,000 on the property. To enable the purchaser to obtain adequate financing, Peyton is to pay the $9,000 in points charged by the lender. The broker's commission on the sale is $75,000. The purchaser agrees to pay the $24,000 in property taxes for the entire calendar year.

What is Peyton's amount realized?

Answer 1

Peyton's amount realized from the sale of an office building is $2,466,000, which includes the cash received, minus the broker's fee and points paid, plus the mortgage assumed by the purchaser.

Step-by-step explanation:

To calculate Peyton's amount realized from the sale of an office building, we need to consider the cash received, the mortgage assumed by the purchaser, the costs Peyton agreed to pay, and any adjustments for prepaid expenses such as property taxes.

The cash received from the sale is $1,600,000. However, we must adjust this by subtracting both the broker's commission, which is $75,000, and the $9,000 Peyton pays for the purchaser's points. Furthermore, we add the mortgage assumed by the purchaser, $950,000. Although Peyton does not receive this money directly, it is considered part of the amount realized because it reduces Peyton's liability.

The property taxes paid by the purchaser ($24,000) are not subtracted from Peyton's amount realized because these taxes apply to the period after the sale and are a liability of the purchaser.

Therefore, Peyton's amount realized can be calculated as:

• Cash received: $1,600,000
• - Broker's commission: $75,000
• - Points paid by Peyton: $9,000
• + Mortgage assumed: $950,000

Total amount realized: $1,600,000 - $75,000 - $9,000 + $950,000 = $2,466,000.