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Janessa contributed $10,000 of cash and land with a fair market value of $70,000 and an adjusted basis of $50,000 to Study Abroad, Inc. (an S corporation) when it was formed. The land was encumbered by a $20,000 mortgage executed two years before. What is Janessa’s tax basis in Study Abroad after formation? a)$20,000 b)$40,000 c)$60,000 d)$80,000

Question

Janessa contributed 10,000ofcashandlandwithafairmarketvalueof10,000 of cash and land with a fair market value of 70,000 and an adjusted basis of 50,000toStudyAbroad,Inc.(anScorporation)whenitwasformed.Thelandwasencumberedbya50,000 to Study Abroad, Inc. (an S corporation) when it was formed. The land was encumbered by a 20,000 mortgage executed two years before. What is Janessa’s tax basis in Study Abroad after formation? a)20,000b)20,000 b)40,000 c)60,000d)60,000 d)80,000

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Solution

To determine Janessa's tax basis in Study Abroad, Inc. after formation, we need to consider the contributions she made and the liabilities she transferred.

  1. Cash Contribution: Janessa contributed $10,000 in cash.
  2. Land Contribution: The land has a fair market value of 70,000andanadjustedbasisof70,000 and an adjusted basis of 50,000.
  3. Mortgage on Land: The land is encumbered by a $20,000 mortgage.

When calculating the tax basis, we start with the adjusted basis of the contributed property and add any cash contributions. We then subtract any liabilities assumed by the corporation.

Step-by-Step Calculation:

  1. Adjusted Basis of Land: $50,000
  2. Add Cash Contribution: $10,000
  3. Subtract Mortgage Assumed by Corporation: $20,000

So, the calculation is as follows: Tax Basis=Adjusted Basis of Land+Cash Contribution−Mortgage Assumed \text{Tax Basis} = \text{Adjusted Basis of Land} + \text{Cash Contribution} - \text{Mortgage Assumed} Tax Basis=$50,000+$10,000−$20,000 \text{Tax Basis} = \$50,000 + \$10,000 - \$20,000 Tax Basis=$40,000 \text{Tax Basis} = \$40,000

Therefore, Janessa’s tax basis in Study Abroad, Inc. after formation is:

b) $40,000

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