Question

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,040 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing. Karin's adjusted basis for the real estate is:

a. $374,580.
b. $375,000.
c. $375,420.
d. $379,620.
e. None of the above.

Answer 1

Karin's adjusted basis for the real estate is the purchase price plus her share of the property taxes paid. The correct answer is $375,420.

Step-by-step explanation:

When Karin purchases real estate for $375,000 and pays the seller $374,580, the difference of $420 represents her share of property taxes already paid in advance for the period she will own the property that year, from February through December. Since property taxes are part of the cost of acquiring property, they must be added to the basis of the property. Therefore, her adjusted basis for the real estate is the purchase price plus her share of the property taxes paid, which is $375,000 (the purchase price) plus $420 (her share of property taxes), totalling $375,420.