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 land is condemned, the basis of that portion is subtracted from the basis of the entire property, and any payment received is used to reduce the basis of the property. Therefore, Joy must reduce the basis of the land by $7,500. There is no need to include the payment in gross income as it is a return of capital rather than income.

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