A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?
A) Joy must include the $7,500 in gross income.
B) Joy must reduce the basis of the land by $7,500.
C) Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Question

Quizplus · Accepted Answer

When a portion of the property is condemned, the property owner must reduce the basis in the property by the value of the property taken by the government or utility company. In this case, Joy's basis would be reduced by the $7,500 payment she received for the condemned strip of land. She does not have to include the $7,500 in gross income because it is considered a return of capital rather than a taxable gain.

A Strip Along the Boundary of Joy's Land Is Condemned