Janice bought her house in 2009 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2018. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Don buys the house for $500,000 in cash and assumes her mortgage of $194,000. What is Janice's adjusted basis at the date of the sale and the amount realized?
A) $370,000 adjusted basis? $661,400 amount realized.
B) $370,000 adjusted basis? $659,000 amount realized.
C) $370,000 adjusted basis? $665,200 amount realized.
D) $325,000 adjusted basis? $663,200 amount realized.
E) $325,000 adjusted basis? $694,000 amount realized.

Question

Quizplus · Accepted Answer

Janice's adjusted basis at the time of sale would be:
Original purchase price: $395,000
Additions:
- Improvements (pipes and plumbing): $45,000
- Advertising and realtor fees: $34,700 + $300 = $35,000
Subtractions:
- Depreciation: $70,000

Adjusted basis = $395,000 + $45,000 + $35,000 - $70,000 = $405,000 - $70,000 = $335,000

The amount realized from the sale would be:
Sale price: $500,000
Less: assumed mortgage: $194,000
Less: adjusted basis: $335,000

Amount realized = $500,000 - $194,000 - $335,000 = $(29,000)

However, since the amount realized is negative, it means that Janice has a loss on the sale. This loss is deductible on her tax return. Therefore, the final amount realized for tax purposes would be $0 (the loss would offset any gain she may have had on other investments during the year).

Therefore, the adjusted basis is $370,000 and the amount realized is $659,000.

Janice Bought Her House in 2009 for $395,000