Question

Albert owns 100 acres of land on which he grows spruce trees. His adjusted basis for the land is $89,600. He receives condemnation proceeds of $8,960 when the city's new beltway takes 5 acres along the eastern boundary of his property. He also receives a severance award of $5,376 associated with the possible harmful effects of exhaust fumes on his trees. Albert invests the $14,336 in a growth mutual fund.
Required:
a. Determine the tax consequences to Albert of the condemnation proceeds.
b. Determine the tax consequences to Albert of the severance award.

Answer 1

Answer:

A. Albert has a $4,480 realized gain of which $4,480 is recognized.

B. Adjusted basis $79,744

Explanation:

a. Calculation to determine the tax consequences to Albert of the condemnation proceeds.

Based on the information given Albert has a REALIZED GAIN of the amount of $4,480 of which the amount of $4,480 is RECOGNIZED, calculated as:

=$8,960 - [(5 acres / 100 acres) x $89,600)]

=$8,960 -$4,480

=$4,480

Therefore the tax consequences to Albert of the condemnation proceeds will be $4,480 realized gain of which $4,480 is recognized.

B. Calculation to Determine the tax consequences to Albert of the severance award.

Based on the information the SEVERANCE AWARD tend to decrease Albert's basis of remaining property which therefore means that His ADJUSTED BASIS in the remaining property will be calculated as:

Adjusted basis=($89,600 - $4,480)- $5,376

Adjusted basis=$85,120-$5,376

Adjusted basis=$79,744

Therefore The the tax consequences to Albert of the severance award will be Adjusted basis of $79,744