Ted purchases some forest land in 2016 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 2017, Ted pays a contractor $4,000 to bulldoze and level the site of the log cabin. In 2018, 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 2016 and $5,000 of property taxes in 2017 and 2018 on the land. What is Ted's basis in the land at the end of 2018?
A)$54,000
B)$42,000
C)$38,000
D)$36,000
E)$32,000

Question

Quizplus · Accepted Answer

Ted's basis in the land includes the purchase price, assumed mortgage, and related purchase costs. Thus, $10,000 (cash) + $19,000 (mortgage) + $3,000 (commissions and legal fees) = $32,000. The costs for bulldozing, leveling, well, and utility lines are improvements to the land, adding $4,000 + $6,000 = $10,000. Therefore, the total basis is $32,000 + $10,000 = $42,000. Property taxes are not included in the basis.

Ted Purchases Some Forest Land in 2016 with the Intention