In: Accounting
Sally owns real property for which the annual property taxes are $12,330. She sells the property to Kate on April 2, 2017, for $616,500. Kate pays the real property taxes for the entire year on October 1, 2017. Assume a 365-day year.
Round any division to four decimal places. Round your final answers to the nearest dollar.
a. How much of the property taxes can be deducted by Sally and how much by Kate? Sally can deduct $ and Kate can deduct $ of the property taxes.
b. What effect does the property tax apportionment have on Kate's adjusted basis in the property? Kate's adjusted basis for the property is increased by the $ she paid that is apportioned to Sally.
c. What effect does the apportionment have on Sally's amount realized from the sale? Sally paid none of the real property taxes and is permitted to deduct the apportioned share of $ . Her amount realized is increased by this amount.
d. How would the answers in parts (b) and (c) differ if the taxes were paid by Sally? If the taxes were paid by Sally, Sally's amount realized would be $ . Kate's adjusted basis would be $ .
a) The property owned by Sally during the year for 92 days [from January 1 to April 2 (31 days Jan.+28 days Feb.+31 days March+2 days April)]. The property tax deducted by Sally will be equal to proportionate tax for 92 days out of total annual property taxes of $12,330 and property tax deducted by Kate will be equal to proportionate tax for 273 days (365 days - 92 days).
Property taxes deducted by Sally = Annual Property taxes*92 days/365 days
= $12,330*92/365 = $3,108
Property taxes deducted by Kate = Annual Property taxes*273 days/365 days
= $12,330*273/365 = $9,222
b) Kate's adjusted basis for the property will increased by $3,108 that is paid by her and apportioned to Sally because Sally did not pay her share of property taxes. Her total Adjusted basis wil be:-
Adjusted Basis = $616,500+$3,108 = $619,608
c) Sally paid none of the real property taxes and is permitted to deduct the apportioned share of $3,108, therefore her amount realized is increased by this amount of $3,108.
Amount realized = Selling Price+Apportioned Property taxes = $616,500+$3,108 = $619,608
d) If the taxes were paid by Sally, Sally's amount realized would be her selling price minus the real property taxes apportioned to Kate (i.e. $616,500 - $9,222) $607,278.
Kate's adjusted basis would be her cost minus the real property taxes apportioned to her (i.e. $616,500 - $9,222) $607,278.