Ralph Birch purchased land and a building which will be used in connection with Birch’s business. The costs associated with this purchase are as follows:
Cash down payment $ 40,000
Mortgage on property 350,000
Survey costs 2,000
Title and transfer taxes 2,500
Charges for hookup of gas, water, and sewer lines 3,000
Back property taxes owed by the seller that were paid by Birch 5,000
What is Birch’s tax basis for the land and building?
a. $ 44,500
b. $394,500
c. $397,500
d. $402,500
Answer:D
The requirement is to determine Birch’s tax basis for the purchased land and building. The basis of property acquired by purchase is a cost basis and includes not only the cash paid and liabilities incurred, but also includes certain settlement fees and closing costs such as abstract of title fees, installation of utility services, legal fees (including title search, contract, and deed fees), recording fees, surveys, transfer taxes, owner’s title insurance, and any amounts the seller owes that the buyer agrees to pay, such as back taxes and interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.