On September 1, of the Current Year, James, a Cash-Basis

question 106

Multiple Choice

On September 1, of the current year, James, a cash-basis taxpayer, sells his cottage to Bill, also a cash-basis taxpayer, for $100,000. James' basis in the cottage is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

• A) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 0 & \$ 3,650 & \text { no effect on gain } \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 3,650 & \$ 0 & \text { decrease gain by } \$ 1,220 \\
• \hline
• \end{array}\]
• C) \(\begin{array}{|l|l|l|}
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline 2,430 & \$ 1,220 & \text { increase gain by } \$ 2,430 \\
• \hline
• \end{array}\)
• D) \[\begin{array} { | l | l | l | }
• \hline\text { Taxes allocated to James } & \text { Taxes allocated to Bill } & \text { Effect on James' Gain } \\
• \hline \$ 1,220 & \$ 2,430 & \text { increase gain by } \$ 1,220 \\
• \hline
• \end{array}\]

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