Question

Taylor is negotiating to buy some land and has two options. Under the first option, Taylor will give Ella $150,000 and assume her mortgage on the land for $100,000. Under the second option, Taylor will give Ella $250,000, and she will immediately pay off the mortgage. Taylor wants his basis for the land to be as high as possible. Given this objective, which option should Taylor select?

Taylor's basis in the land under Option 1 is $_____

Answer 1

Taylor should select the second option where he pays $250,000 outright to achieve the highest basis in the land, which would be the full $250,000 paid. The first option would give him a basis of $250,000 but includes assuming a mortgage which does not contribute to the original cost basis.

Step-by-step explanation:

The question involves the concept of basis in property which in the context of real estate is the total cost paid for a property including the purchase price, closing costs, and other expenses. The basis is important for tax purposes as it is used to calculate depreciation, amortization, and gains or losses upon selling the property.

For Taylor to maximize his basis in the land, he should select the option where he pays the full amount for both the land and the mortgage. In the first option, Taylor's basis would be $250,000 ($150,000 he paid Ella plus the $100,000 mortgage he is assuming). However, it is important to note that assuming a mortgage means taking on the debt and the liability, not contributing to the original cost basis.

If Taylor prefers a higher basis for tax purposes, such as for maximizing potential depreciation, he should opt for the second option where he pays $250,000 outright. In this scenario, the basis of the land would be the full $250,000 since he is effectively paying for the value of the property without taking on the existing mortgage.