The city of Richmond is going to condemn some buildings to build a park. Steve's principal residence is among those to be condemned. His adjusted basis for the house and land is $120,000. The appraised value of the house and land is $104,000.
Steve is unaware of the future condemnation proceedings, but would like his family to move to a better neighborhood. Therefore, when Ross, a realtor, mentions that he may have a corporate client who would like to purchase the property for $130,000 Steve is ecstatic and indicates a willingness to sell.
Ross is having second thoughts about his conversation with Steve. The potential corporate purchaser is a company owned by Ross and his wife. Ross is aware of the future condemnation proceedings. He considers himself a skilled negotiator and thinks that he can negotiate a $260,000 price for the house. Ross is considering telling Steve that the corporate client has changed its mind. Ross would then indicate that he has learned the city will be condemning several buildings to create a park, but has not yet established the prices it will pay for the condemned property. He would also tell Steve that because he believes he can get more from the city than Steve would obtain, he is willing to gamble and purchase the property now from Steve for $130,000.
Ross will point out several benefits available to Steve. These include (1) not having to deal with the city, (2) receiving an amount that exceeds both the appraised value and the original purchase cost of the home, and (3) receiving the money now. While admit ting that he could reap a substantial profit, Ross would emphasize that he would also be taking on substantial risks. In addition, Ross would explain that when he sells the property to the city, he will defer the taxes by reinvesting the sales proceeds (due to involuntary conversion).
Should Ross make a new proposal to Steve based on his second thoughts? How do you think Steve will respond?