Question

1. Carol sold her personal residence to Mike for $300,000. Before the sale, Carol paid the real estate taxes of $8,000 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $5,000 to Carol and $3,000 to Mike.
   

a. What is Mike’s basis in the residence?

b. What is Carol’s amount realized from the sale of the residence?

c. What amount of real estate taxes can Mike deduct?

d. What amount of real estate taxes can Carol deduct?

Answer 1

a)

First of all the starting point for determining Mike's basis in the residence is the amount he has paid while purchasing.

This is called its cost basis.

So Mike's basis is $300,000.

Here Carol has already paid the real estate taxes for the residence for the given calendar year. So we don't have to add any tax amount to the basis.

b) Carol sold her residence for the value of $300,000.

Apart from this the tax deduction for carol is $5000.

So The total amount realized is = $300,000 + $5000

= $305,000.

So Carol's total amount realized from the sale of residence is $305,000.

c) Here for 2019 tax season, as per the new limit one can deduct up to $5000 in a given year.

But for the given calendar year Mike didn't pay any real estate taxes.

The property tax for given year has already been paid by Carol.

So as Mike didn't pay any amount of real estate taxes, he can not deduct any amount. i.e the amount of real estate taxes that Mike can deduct is $0.

d) As we know for 2019 tax season, as per the new limit one can deduct up to $5000 in a given year.

Carol has already paid for the real estate tax. And for carol the proportion of tax that can be deducted is given as $5000.

So Carol can deduct amount of $5000 of real estate taxes.