Understanding Recognized Gain or Loss on Building and Land Sale

Recognized Gain or Loss on Building Sale

Luke sold a building and the land on which the building sits to his brother at fair market value. The fair market value of the building was determined to be $325,000; Luke built the building several years ago at a cost of $200,000. Luke had claimed $45,000 of depreciation expense on the building. Luke's brother will use the building in his business.

Recognized Gain or Loss on Land Sale

The fair market value of the land was determined to be $210,000 at the time of sale; Luke purchased the land many years ago for $130,000.

Questions:

A. What is the amount and character of Luke's recognized gain or loss on the building?

B. What is the amount and character of Luke's recognized gain or loss on the land?

Answers:

(a) $170,000

(b) $80,000

Explanation:

(a) The amount and character of Luke's recognized gain or loss on the building: = (Fair market value - cost to built) + Depreciation expense = ($325,000 - $200,000) + $45,000 = $170,000

(b) The amount and character of Luke's recognized gain or loss on Land: = (Fair market value - Purchasing cost = ($210,000 - $130,000) = $80,000