Ted purchases some forest land in 2012 with the intention of building a log cabin to use as a vacation home. To obtain the land, Ted pays $10,000 cash, assumes the seller's $19,000 mortgage on the land and pays $3,000 in commissions and legal fees related to the purchase. In 2013, Ted pays a contractor $4,000 to bulldoze and level the site of the log cabin. In 2014, Ted has a well dug and water and sewer lines laid in the ground at a cost of $6,000. Ted paid $2,000 of property taxes in 2012 and $5,000 of property taxes in 2013 and 2014 on the land. What is Ted's basis in the land at the end of 2014?

Question

Quizplus · Accepted Answer

Ted's basis in the land includes the purchase price, assumed mortgage, and related fees. It does not include costs for improvements or property taxes. Therefore, the basis is $10,000 (cash) + $19,000 (mortgage) + $3,000 (fees) = $32,000. The costs for bulldozing, leveling, well, and utilities are improvements to the land, adding $6,000 (well and utilities) to the basis, totaling $38,000.

Ted Purchases Some Forest Land in 2012 with the Intention