Question

Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $213,000. The appraised fair market value of the warehouse was $101,250, and the appraised value of the land was $119,250. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

a. What is Bob’s basis in the warehouse and in the land?

b. What would be Bob’s basis in the warehouse and in the land if the appraised value of the warehouse is $76,250, and the appraised value of the land is $144,250?

c. Which appraisal would Bob likely prefer?

Appraised value in part (a)

Appraised value in part (b)

Answer 1

a. Bob’s cost basis in the land is $115,190 and warehouse is $ 97,810

Because the purchase price ($213,000) is less than the appraised values for the land ($119,250) and the warehouse ($101,250), the purchase price must be allocated between the land and the warehouse.

Calculation for land = Purchase Price ($213,000) x Appraised value of Land ($119,250) / Total Appreaised value of Land and Warehouse ($119,250 + $101,250 = $ 220,500)

= $213,000 x 0.5408 = $115,190

For Warehouse = $213,000 - $115,190 = $97,810

b. Bob’s cost basis in the warehouse is $76,655 and land is $ 139,345

Calculation for warehouse = Purchase Price ($213,000) x Appraised value of warehouse ($76,250) / Total Appreaised value of Warehouse and Land ($76,250 + $144,250 = $ 220,500)

= $213,000 x 0.3458 = $73,655

For Land = $213,000 - $73,655 = $139,345

c. Bob would likely prefer the appraisal from part (a), because the appraisal allows him to allocate more basis to the warehouse, which is depreciable.