Question

luke sold a building and the land on which the building sits to his wholly owned corporation, studemont corporation, at fair market value. the fair market value of the building was determined to be $332,500; luke built the building several years ago at a cost of $275,000. luke had claimed $65,000 of depreciation on the building. the fair market value of the land was determined to be $252,000 at the time of the sale; luke purchased the land many years ago for $149,250. What is the amount and character of Luke’s recognized gain or loss on the building?

Answer 1

Luke's recognized gain on the building is $122,500 and it is characterized as a long-term capital gain since the building has been held for more than one year. The gain is calculated by subtracting the adjusted basis of the building, which has been reduced by depreciation claimed, from the fair market value at the sale.

Step-by-step explanation:

The question is asking to calculate the amount and character of Luke's recognized gain or loss on the sale of a building to his wholly owned corporation at fair market value.

After Luke has claimed depreciation of $65,000 on the building, his adjusted basis in the building becomes $275,000 (original cost) - $65,000 (depreciation) = $210,000. When he sells the building for its fair market value of $332,500, the recognized gain is $332,500 (sale price) - $210,000 (adjusted basis) = $122,500.

This recognized gain is characterized as a capital gain, and it's a long-term gain if the building was held for more than one year. For the land, the realized gain would similarly be the fair market value at the time of the sale ($252,000) minus the original purchase price ($149,250), which equals $102,750. However, since land is not depreciable, there are no adjustments to its cost basis.