Harwood Company purchased an office building for $5,000,000 cash on April 1.Prior to renting it out to tenants on July 1,Harwood spent $1,000,000 on materials and labor to renovate the property.It funded $100,000 of the renovation cost with its own funds and borrowed the remaining $900,000.As of July 1,$10,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is

Question

Quizplus · Accepted Answer

The basis of the building on July 1 is the purchase price plus any capital expenditures made before it was placed in service. Therefore, the basis of the building on July 1 is $5,000,000 + $1,000,000 = $6,000,000. The $100,000 expenditure that was funded with Harwood's own funds does not affect the basis since it is already reflected in the purchase price. The $900,000 borrowed for the renovation is not yet considered since none of the principal has been repaid, but the $10,000 interest paid is still a deductible expense. Therefore, the final basis of the building on July 1 is $6,000,000 + $10,000 = $6,010,000.

Harwood Company Purchased an Office Building for $5,000,000 Cash on April