Sam bought a building for $200,000, its approximate fair market value. The building is depreciable property. For each of the following scenarios, what is Sam’s basis in the building?

@ The person saying the question in not clear: The question says that someone purchases a building for $200,000 which is it's FMV. For each of the questions (I.e. a, b, c) what is the taxpayer's basis in that building. Each scenario is independent of one another. For example, in a, Sam's basis is $200,000 since he paid $200,000 cash from his own pocket.

1. (a) Sam pays $200,000 cash from his own pocket.

2. (b) Sam pays the seller $200,000 cash borrowed from the bank on an unsecured recourse basis.

3. (c) Sam pays $100,000 from his own pocket and $100,000 borrowed from the bank on an unsecured recourse basis.

4. (d) Sam assumes an existing mortgage of $100,000 encumbering the property and pays the seller $100,000 in cash.

5. (e) Sam pays the seller $100,000 in cash, executes a note for the $100,000 balance, and gives the seller a purchase money mortgage for which he is personally liable.

6. (f) Sam pays the seller $100,000 in cash and provides a $100,000 purchase money mortgage for which he is not personally liable.

7. (g) Sam pays the seller $100,000 cash and provides a $100,000 nonrecourse purchase money mortgage. After a few years the property has appreciated in value, and Sam obtains a nonrecourse loan, secured by the property, for$150,000.

   Part II

Assume that we are in Scenario (g), above (i.e., Sam pays the seller $100,000 cash and provides a $100,000 nonrecourse purchase money mortgage, and subsequently takes out a second nonrecourse loan, secured by the property, for $150,000). In addition, assume that Sam has held the building for seven years, during which time he has taken cost recovery deductions of $50,000 and has paid off $50,000 of the second mortgage. In Year 7, Sam sells to a buyer who pays him

$50,000 in cash and takes the building subject to the $100,000 first mortgage and the $100,000 remaining on the second mortgage.

(h) What is Sam’s basis in the building?

(i) What is Sam’s gain or loss on the sale?

Now change the facts again: assume that instead of selling in Year 7, Sam defaults on the mortgage when the property is worth $175,000. The combined mortgage balance on the nonrecourse first and second mortgages equals $200,000.

(j) What is Sam’s gain or loss on the foreclosure?

Answer rating: 100% (QA)

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