Question

Steve Drake sells a rental house on January 1, 2019, and receives $100,000 cash and a note for $50,000 at 7 percent interest. The purchaser also assumes the mortgage on the property of $25,000. Steve's original cost for the house was $170,000 on January 1, 2011 and accumulated depreciation was $27,000 on the date of sale. He collects only the $100,000 down payment in the year of sale.

If Steve elects to recognize the total gain on the property in the year of sale, calculate the taxable gain.

Answer 1

Answer:

$32,000  

Explanation:

The computation of the taxable gain is shown below;

Taxable gain on sale = Amount Realized - Adjusted Basis

where,

Amount Realized = Cash Received + Note received + Mortgage assumed by Purchaser

= $100,000 +$50,000 + $25,000

= $175,000

And, the adjusted basis is

= Original cost - Accumulated Depreciation

= $170,000 - $27,000

= $143,000

So, the taxable gain on sale is

= $175,000 - $143,000

= $32,000            

The gain which is arise from purchasing the asset to the sale of the asset i.e difference in these amounts attract the taxable gain