What are the federal income tax consequences of a sale of the Austin rental property if the Monroes had taken $4,308 as a depreciation deduction for the property?

The rental property, which is valued at $84,000, is located in Austin, Texas, and consists of a small strip shopping center. The center is in a poor location and is cur- rently a break-even proposition as income equals expenses. The property was acquired from June’s Aunt Grace three years ago as a gift. Grace's basis in the property was $20,000 ($5,000 for the land and $15,000 for the building). At the time of the gift, the property had a fair market value of $60,000. Grace died last year, and at the time of her death the property was valued at $80,000.

Prior to Grace’s death, June and Karl would never dispose of the rental property for fear of offending Grace; however, they now want to buy a strip shopping center in San Antonio at a cost of $100,000 by using a small mortgage of $16,000. A tenant in the Austin property would consider buying the rental property for the fair market value of $84,000.

An old friend of yours is a real estate investor in Austin. You mention the Monroes’ strip mall to him and ask him whether he knows what the property might be worth. He says one of his friends in state government has told him that the highway commission plans to purchase the property for $125,000 within the next couple of years as part of a new highway project going through the neighborhood. He tells you he is willing to pay the Monroes $90,000 for the property if you will connect him with them and, if the state does buy the property, he will give you one-third of his profits.

Answer rating: 100% (QA)

The sale of the rental property will trigger a taxable gain or loss ... View the full answer