Question

Arnold gave land to his son, Bruce. Arnold's basis in the land was $100,000, and its fair market value at the date of the gift was $150,000. Bruce borrowed $130,000 from a bank that he used to improve the property. He sold the property to Della for $360,000. Della paid Bruce $90,000 in cash, assumed his $120,000 mortgage, and agreed to pay $150,000 in two years. Bruce's selling expenses were $10,000. Della is going to pay adequate interest.

Compute the following amounts:
a. Bruce's basis in the land at the time of the sale is ______.
b. When computing his realized gain, what amount does Bruce use as the selling price and as the contract price?
Selling price: $ ______.
Contract price: $ ______.
c. Bruce's total realized gain on the sale is $ ______, but his recognized gain in the year of the sale is $ ______.

Answer 1

A) Bruce's basis in the land at the time of the sale = $100,000 (same as his father's)

B) When computing his realized gain, what amount does Bruce use as the selling price and as the contract price?

Selling price= $360,000.

Contract price = $360,000 (selling price) - $120,000 (assumed mortgage) = $240,000.

C) Bruce's total realized gain on the sale = $360,000 - $10,000(selling costs) - $230,000(land + improvements) = $120,000

But his recognized gain in the year of the sale is = ($120,000 / $240,000) x $90,000 = $45,000