Question

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?

a. Joy must include the $7,500 in gross income.
b. Joy must reduce the basis of the land by $7,500.
c. Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.
d. Only a. and c. are correct.
e. a., b., and c. are correct.

Answer 1

Joy must reduce the basis of the land by $7,500.

Step-by-step explanation:

Joy must decrease the basis of the land by $7,500 because the strip along the boundary of her land is condemned for a utility easement. The payment she received from the utility company is considered a reimbursement for the loss of value of her land. Therefore, it reduces her basis in the land.