Question

Florian Corporation purchases a piece of land for investment purposes on April 1. Florian pays the seller $2,010 cash and agrees to pay the seller $2,860 per year for the next 5 years plus interest at 9% per year on the outstanding balance. As part of the purchase agreement, Florian agrees to pay all property taxes for the year, a total of $340. In addition, Florian pays legal fees of $550 connected with the purchase and gives the seller a car worth $3,780 (Florian's basis is $11,800). Florian Corporation's basis in the land is $__________ .

Answer 1

Florian Corporation's basis in the land is $20725

The initial basis is equal to the cost of acquiring the land. In this case, Florian has paid $2,010 cash and agreed to pay an additional $14300 ($2860 x 5) over the next 5 years. The interest paid on the installment purchase is not capitalized as part of the cost of the land; it will be deducted each year according to the rules for deducting interest. The property taxes of $85 [$340 x (3 ÷ 12) are the seller's obligation and is part of the negotiated purchase price. The $3780 fair market value of the car that Florian gave to the seller is also part of the purchase price. The $550 of legal fees are a cost of acquiring the land and are added to the initial basis. This gives Florian an initial basis of $20725

Cash paid = $ 2,010

Installment payments =14300

Seller's property taxes paid = 85

Fair market value of car = 3780

Legal fees = 550

Initial basis =$20725