Tax Implications And Calculation Of Realized, Recognized, And Characterized Gain In The Sale Of a Residential Rental Property

Learn how to calculate tax implications and gains from rental property sales with this Homework Solution.

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Tax Implications and Calculation of Realized, Recognized, and CharacterizedGain in the Sale of a Residential Rental PropertyFACTS:Ms. T Terri purchased an apartment on February 21, 2010 for $3,000,000 with 90% of thepurchase priceallocated to the building. 10% went to the land. She sold the apartment onSeptember 2, 2012 for $3,600,000 with 90% of the sales price allocated to the building. Thepurchaser paid T. Terri $600,000 cash and assumed a $3,000,000 mortgage on theproperty. T. Terri’s only other taxable property transaction during the past ten years wasthree years ago and it resulted in a Sec. 1231 loss of $100,000. (Normally, T. Terri engagesin wholly non-taxable Sec. 1031 exchanges.) While T. Terri owned the apartment, 100% ofthe gross rental income was “rental income from dwelling units” (You may assume that herrental of the apartment building was a profit-motivated “trade or business.”) T. Terri issingle and had a taxable income of $1,000,000 in 2012 (without including the taxconsequences of the sale of the apartment)IssuesPart 11.What is T. Terri’s realized gain or loss on this transaction? (Assume for purposes of Part1 only that T. Terri has, or will have, deducted in her federal income tax returns a total of$250,000 in depreciation on the apartment building through the date of the sale)Answer:Realized Gain Calculation:1.Amount Realized:oSale price: $3,600,000oCash received: $600,000oMortgage assumed by purchaser: $3,000,000oTotal amountrealized: $3,600,0002.Adjusted Basis:oOriginal purchase price: $3,000,000oAllocation to building (90%): $2,700,000oDepreciation deducted on building (assumed): $250,000oAdjusted basis of building: $2,700,000-$250,000 = $2,450,000oAllocation to land (10%): $300,000 (no depreciation taken on land)Total adjusted basis: $2,450,000 (building) + $300,000 (land) =$2,750,000

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Tax Implications And Calculation Of Realized, Recognized, And Characterized Gain In The Sale Of a Residential Rental Property

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Tax Implications Of The Sale Of Rental Property: A Case Study On T. Terri's Apartment Sale

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