Question

Exercise 13-26 (Algorithmic) (LO. 1)

Sally owns real property for which the annual property taxes are $12,530. She sells the property to Kate on April 2, 2018, for $626,500. Kate pays the real property taxes for the entire year on October 1, 2018.

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   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   permitted to deduct the apportioned share of $. Her amount realized is   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
$.

Answer 1

(a)

Property taxes can be deducted by Sally and Kate:

Annual property taxes = $12,530

Therefore,

Sally: $12,530 * 3/12(Jan, Feb, Mar) = $3132.50( Sally can deduct this amount.)

Kate: $12,530 *9/12(April to December) =$ 9,397.50 (Kate can deduct this amount)

(b)

Kate adjust the tax amount paid by Sally and Kate did not pay that amount and the property value is increased by 3,132.5 (S amount as did not pay)

Cost $626,500 + 3,132.50 = $629,632.5 adjusted properly value

(c)

Selling price $626,500 +  3,132.5 amount realized $629,632.5 as Sally did not pay property taxes and she deducted it.

(d)

Sally's amount realized would be her selling price minus real property taxes apportioned to K ($626,500-$9,397.5 ) = $617,102.5

Kate's adjusted property value would be her cost minus the real property taxes apportioned to her ($626,500-$9,397.5 ) = $617,102.5