Question

Hilary receives $10,000 for a 15-foot wide utility easement along one of the boundaries to her property. The easement provides that no structure can be built on that portion of the property. Her adjusted basis for the property is $200,000 and the easement covers 15% of the total acreage. Determine the effect of the $10,000 payment on Hilary's gross income and her basis for the property.

A. The $10,000 is included in gross income; the basis for the property is reduced by $10,000.

B. The $10,000 is not included in gross income; the basis for the property is reduced by $10,000.

C. The $10,000 is included in gross income; the basis for the property is not affected.

D. The $10,000 is not included in gross income; the basis for the property is not affected.

Answer 1

The $10,000 payment is included in gross income; the basis for the property is reduced by $10,000.

Step-by-step explanation:

The $10,000 payment for the utility easement along Hilary's property will be included in her gross income for the year. This is because any income received is generally considered as taxable according to the US federal tax code. On the other hand, the basis of the property will be reduced by $10,000 due to the easement. This means that the adjusted basis for the property will now be $200,000 - $10,000 = $190,000.