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Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

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Answer:

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

  • warehouse basis = $53,571
  • land basis = $71,429

Explanation:

since the total appraisal value was $75,000 + $100,000 = $175,000, we must allocate the basis using a coefficient = $125,000 / $175,000 = 0.714285

  • warehouse basis = appraised value x coefficient = $75,000 x 0.714285 = $53,571
  • land basis = appraised value x coefficient = $100,000 x 0.714285 = $71,429
  • total = $53,571 + $71,429 = $125,000 (total purchase price)

Since the transaction price was lower than the appraised value, we must adjust the basis for both the land and the warehouse in the same proportion.

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