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Tax Implications And Calculation Of Realized, Recognized, And Characterized Gain In The Sale Of a Residential Rental Property

Learn how to calculate tax implications and gains from rental property sales with this Homework Solution.

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    Tax Implications and Calculation of Realized, Recognized, and Characterized Gain in the Sale of a Residential Rental Property FACTS: Ms. T Terri purchased an apartment on February 21, 2010 for $3,000,000 with 90% of the purchase price allocated to the building. 10% went to the land. She sold the apartment on September 2, 2012 for $3,600,000 with 90% of the sales price allocated to the building. The purchaser paid T. Terri $600,000 cash and assumed a $3,000,000 mortgage on the property. T. Terri’s only other taxable property transaction during the past ten years was three years ago and it resulted in a Sec. 1231 loss of $100,000. (Normally, T. Terri engages in wholly non - taxable Sec. 1031 exchanges.) While T. Terri owned the apartment, 100% of the gross rental income was “rental income from dwelling units” (You may assume that her rental of the apartment building was a profit - motivated “trade or business.”) T. Terri is single and had a taxable income of $1,000,000 in 2012 (without including the tax consequences of the sale of the apartment) Issues Part 1 1. What is T. Terri’s realized gain or loss on this transaction? (Assume for purposes of Part 1 only that T. Terri has, or will have, deducted in her federal income tax returns a total of $250,000 in depreciation on the apartment building through the date of the sale) Answer: Realized Gain Calculation: 1. Amount Realized: o Sale price: $3,600,000 o Cash received: $600,000 o Mortgage assumed by purchaser: $3,000,000 o Total amount realized: $3,600,000 2. Adjusted Basis: o Original purchase price: $3,000,000 o Allocation to building (90%): $2,700,000 o Depreciation deducted on building (assumed): $250,000 o Adjusted basis of building: $2,700,000 - $250,000 = $2,450,000 o Allocation to land (10%): $300,000 (no depreciation taken on land) Total adjusted basis: $2,450,000 (building) + $300,000 (land) = $2,750,000

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