# Let's look at some examples.

Example 1

Joe went to the local car dealer and purchased a new car. He gave the dealer \$2,000 in cash and took out a loan of \$13,000.

The basis of his car is \$15,000.

### Cost Basis - Exercise 1

Mr. Ripley made a \$4,000 deposit on December 1, 2012, on a conditional contract to purchase a building and lot from Mr. Pratt. They signed the contract on January 1, 2013, at which time Mr. Ripley made a \$12,000 down payment and gave Mr. Pratt a negotiable note of \$40,000 secured by a mortgage on the property. The note called for payments of \$2,000 on July 1 of each year for 20 years, with interest of 8% each year.

Compute Mr. Ripley’s basis in the property as of January 1, 2013 and enter it in the space below.

### Cost Basis - Exercise 2

Determine the basis of the machine shown below, which was purchased for use in the manufacture of vinyl flooring and enter it in the space below.

 purchase price (cash) \$30,000 finder's fee to locate machine 1,500 delivery cost 2,000 installation 8,000 major reconditioning before placing in service 10,000 electricity to run the machine 800 minor repairs after being placed in use 2,000

### Computations - Exercise 3

Kevin purchased a building from Mark for \$70,000. Real estate tax of  \$3,000 was not paid before the time of sale. The total amount of \$3,000 is attributable to Mark’s holding period; but Kevin paid the taxes in addition to the \$70,000 purchase price of the building.

What is Kevin’s basis in his new building? Enter it in the space below.

## Basis of Constructed Property

### Designated Property - Exercise 4

John Snow owns a cabinet-making shop. In 2013, he puts an addition on the building where the cabinets are manufactured. He spent the following amounts during the construction period:

Compute Mr. Snow’s basis in the building addition and enter it in the space below.

 architect's fees \$1,000 building permit 500 roofing material 1,500 lumber (half used for the addition, balance used to construct cabinets produced for sale to the public.) 12,000 wages paid to the employees of the company, who spent 1/3 of their time building the addition. 30,000 siding and exterior finish materials 5,000 interior finish materials 4,000 electrical subcontractor 3,000 plumbing subcontractor 2,000 Interest on a line of credit during the production period to finance the addition. 900

# Let's look at a few examples.

Example 7

Jim purchased a house from an unrelated party to use as a rental property. He paid \$200,000. The house is valued at \$120,000; and the land the house sits on is valued at \$30,000 (\$150,000 total). The basis of each component of the property is computed as follows:

### Purchase of Land and Building - Exercise 5

Mr. Bates purchased a commercial building for \$250,000 from an unrelated party. Included in the purchase were two acres of land that were assessed a value of \$50,000 at the time of sale. The building was assessed a value of \$150,000.

Determine the basis of the land and enter it in the space below.

Determine the basis of the building and enter it in the space below.

### Amounts Allocated to a Capital Asset - Exercise 6

#### In this case, the value of the property and the cost are the same. Expenses of purchase and the closing costs must be allocated to each asset purchased, specifically, the land and the building.Please review the calculation.   Building Land Allocated purchase price \$30,000 \$10,000 Allocated expense of purchase 3,000 1,000 Basis \$33,000 \$11,000

Jill purchased a rental property in May 2013. The purchase price was \$40,000. The land was valued at \$10,000 and the building at \$30,000.

During 2013, Jill incurred the following expenses:

 legal fees and transfer fees paid at closing \$4,000 new siding purchased August 2013 6,000 utilities 1,200 repairs (all minor) to furnace, plumbing, and storm windows paid at various times 600 cost of new water heater 600

At the time of purchase, what is the basis of the building? Enter your response in the space below.

At the time of purchase, what is the basis of the land? Enter your response in the space below.

### Amounts Allocated to a Capital Asset - Exercise 6

Part B

Jill purchased a rental property in May 2013. The purchase price was \$40,000. The land was valued at \$10,000 and the building at \$30,000.

During 2013, Jill incurred the following expenses:

 legal fees and transfer fees paid at closing \$4,000 new siding purchased August 2013 6,000 utilities 1,200 repairs (all minor) to furnace, plumbing, and storm windows paid at various times 600 cost of new water heater 600

What is the adjusted basis of the building? Enter your response in the space below.

What is the adjusted basis of the land? Enter your response in the space below.

# Let's look at an example.

Example 10

Robert had a flood in his bicycle shop that caused damage of \$10,000. He received \$8,000 from insurance and deducted a \$2,000 loss on his return (for which he received a tax benefit). The basis of the bicycle shop is reduced by \$10,000 (the \$8,000 of insurance received and the \$2,000 loss claimed). Any amount he spends to restore the bicycle shop will be an addition to basis.

### Capital Recoveries - Exercise 7

In January 2013, Mr. Bates built a small factory building on a piece of land that he owned. The factory cost \$80,000 to construct. In March 2013, a fire destroyed the top floor of the factory, causing damages of \$15,000 to the building. The insurance company paid \$10,000 in reimbursement, and Mr. Bates claimed a casualty loss of \$5,000 on his return. He spent \$12,000 repairing the damage and restoring the property.

What is his adjusted basis in the property? Enter your response in the space below.

### Depreciation Amortization Depletion - Exercise 8

In 2011, Ivan paid \$24,000 for a delivery truck to use in his business. He claimed depreciation in 2011 of \$4,800 and of \$7,680 in 2012. On January 1, 2013, he traded the truck in and purchased a larger one.

What is the adjusted basis of his truck at the time of trade-in? Enter your response in the space below.