CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A client, Mr. Johnson, purchased a tract of land for $200,000. He incurred surveying fees of $5,000, legal fees for title examination of $3,000, and real estate taxes of $2,000 that were due prior to the purchase but paid by Mr. Johnson at closing. What is Mr. Johnson's adjusted basis in the land?
- A$208,000
- B$210,000
- C$205,000
- D$200,000
Show answer & explanationAnswer & explanation
Correct answer: A. $208,000
The adjusted basis of land includes its purchase price plus all costs incurred to acquire and prepare it for its intended use, such as surveying and legal fees. Real estate taxes paid by the buyer that were due prior to purchase are also capitalized into basis.
Why the other options are wrong
- B. This option incorrectly includes the real estate taxes twice or miscalculates.
- C. This option incorrectly excludes legal fees and real estate taxes paid at closing.
- D. This option incorrectly excludes all additional acquisition costs.
Cost Basis of Property
The cost basis of property is generally its purchase price plus any expenses incurred to acquire and prepare the property for its intended use.
- Includes purchase price
- Includes acquisition costs (e.g., legal fees, surveying fees)
- Does not include current period operating expenses (e.g., annual property taxes)
Memory trick: Basis is the 'Cost-Plus' to get it Ready.