Sale of Land - Pennsylvania Return

[Yardley CPA]

I have a client who sold land in 2014.  I've completed the 8949 showing a long term capital gain:

 

- Proceeds:  $15,000

- Cost basis  <$3,200>

- Realty Commission: <$1,650>

- Long Term Cap Gain $10,150

 

Can someone please tell me if the realty commissions are added to the basis for the Pennsylvania return?  I cant seem to find an answer for that.

 

Thank you!

[rfassett]

I can not give you a site, but being  a cost of the sale, I have always included it in basis.  Just because I do it doesn't make it right.  But my guess is, I looked into this many years ago and confirmed my treatment was correct.  I will look and see if I can find some support.

[rfassett]

This should leave you feeling warm and fuzzy.  But this is actually saying that you reduce the sales price by the selling expenses as opposed to adding the selling expenses to basis.  Gets you to the same place.

 

 

§ 103.13. Net gains or income from disposition of property.

 (a)  Gain or loss. A gain on the disposition of property is recognized in the taxable year in which the amount realized from the conversion of the property into cash or other property exceeds the adjusted basis of the property. A loss is recognized only with respect to transactions entered into for gain, profit or income and only in the taxable year in which the transaction, in respect to which loss is claimed, is closed and completed by an identifiable event which fixes the amount of the loss so there is no possibility of eventual recoupment.

 (b ) Stock dispositions. Corporate reorganizations, acquisitions and recapitalizations shall be a sale, exchange or disposition resulting in a taxable gain or loss to the shareholders whether or not the gain or loss is recognized for purposes of the Federal income tax, except as provided in the TRC. The transfer of property or anything else of value to a corporation in exchange for an interest therein is a sale, exchange or disposition resulting in a taxable gain or loss. A resident shareholder shall report as taxable gain in the taxable year in which it was received or credited the excess of the fair market value of any ‘‘return of capital’’ distribution over the adjusted basis of his stock. A ‘‘return of capital’’ distribution is a distribution which is not made or credited by a business corporation or association out of its earnings and profits. The basis of stock or shares held by a resident shareholder shall be decreased, but not below zero, by a distribution which is not taxable dividend income.

 Example. B Corporation distributed from its capital account $100,000 to its sole stockholder, S, a resident of Pennsylvania. The adjusted basis of S’s stock was $75,000. As the distribution is not made out of earnings and profits, the $100,000 does not represent taxable dividend income to S. S must, however, decrease the adjusted basis of the stock from $75,000 to zero and report the remaining $25,000 of the $100,000 ‘‘return of capital’’ distribution as a taxable gain.

 (c )  Basis. If property is acquired by a taxpayer by inheritance, the basis shall be the fair market value at the date of death. If property is acquired by a taxpayer by gift, the basis shall be the same as it would be if the property had remained in the hands of the donor. Otherwise, the basis shall be the cost.

 (d)  Sales made before June 1, 1971. Payments received pursuant to an installment sale made before June 1, 1971, are not subject to tax except as to separately stated interest payments.

 (e)  Gain or loss on property acquired on or after June 1, 1971. The amount subject to tax shall be the net gains or net income less net losses derived from the sale, exchange or other disposition of property—real or personal, tangible or intangible—to the extent that the value of that which is received or receivable is greater than or, in the case of a loss, less than the basis of the taxpayer. The basis shall be increased by capital expenditures made after the property was acquired and decreased by depreciation or amortization, allowed or allowable, after the property was acquired.

 (f)  Gain or loss on property acquired prior to June 1, 1971. If the property was acquired prior to June 1, 1971, the amount subject to tax shall be the net gains or net income less net losses derived from the sale, exchange or other disposition of property—real or personal, tangible or intangible—to the extent that the value of that which is received or receivable is greater than or, in the case of a loss, less than the basis of the taxpayer determined as follows:

   (1)  The basis as of June 1, 1971, for determining gain shall be the cost or other basis as adjusted or its fair market value as of June 1, 1971, whichever is greater.

   (2)  The basis as of June 1, 1971, for determining loss shall be the cost or other basis as adjusted without reference to the fair market value as of June 1, 1971.

   (3)  The application of paragraphs (1) and (2) may be illustrated by the following example:

     (i)   On June 1, 1966, a taxpayer purchased for $50,000 property having a useful life of 50 years. Assuming that there were no capital improvements to the property before June 1, 1971, the depreciation allowed or allowable on the property before June 1, 1971, was $5,000 (5 years at $1,000), so that the original cost adjusted, as of June 1, 1971, for depreciation allowed or allowable prior to that date is $45,000. On that date the property had an appraised fair market value of $90,000 with a remaining life of 45 years. The property was sold on June 1, 1980, for $120,000.

     (ii)   For the purpose of determining gain from the sale, exchange or other disposition of the property on June 1, 1980, the basis of the property is the fair market value of $90,000 as of June 1, 1971, adjusted for depreciation allowed or allowable after May 31, 1971, computed on $90,000. Thus, the basis of $90,000 is reduced by the depreciation adjustment from June 1, 1971, to May 31, 1980, in the aggregate of $18,000 (9 years at $2,000—$90,000 ÷ 45), leaving an adjusted basis for determining gain of $72,000 ($90,000 less $18,000). Taxpayer would be subject to tax on a gain of $48,000 ($120,000 less $72,000).

     (iii)   Assume the same facts as in subparagraph (i) except that the taxpayer purchased the property for $90,000 on June 1, 1966, and the property had a fair market value of $30,000 on June 1, 1971. The depreciation allowed or allowable on the property before June 1, 1971, was $9,000 (5 years at $1,800) so that the original cost adjusted, as of June 1, 1971, for depreciation allowed or allowable prior to that date is $81,000. For the purpose of determining gain the basis of the property is its cost of $90,000 reduced by the depreciation adjustment allowed or allowable in the aggregate of $25,200 (14 years at $1,800—$90,000 ÷ 50), leaving an adjusted basis for determining gain of $64,800 ($90,000 less $25,200). Taxpayer would be subject to tax on a gain of $55,200 ($120,000 less $64,800).

     (iv)   Assume the same facts as in subparagraph (i) except that the property was sold on June 1, 1980, for $20,000. For the purpose of determining loss from the sale, exchange or other disposition of the property on June 1, 1980, the basis of the property is its cost, adjusted for depreciation allowed or allowable. In this example, the amount of depreciation allowed or allowable is $15,000 (15 years at $1,000). Therefore the adjusted basis for determining loss on June 1, 1980, is $35,000 ($50,000—$15,000). The taxpayer would report a loss of $15,000.

   (4)  If the selling price is greater than cost but less than the June 1, 1971, value, there is neither taxable gain nor loss. The application of this paragraph may be illustrated by the following example:

 Example: Assume that acquisition cost is $10,000, June 1, 1971, value is $30,000 and the selling price is $20,000. If the rules in paragraph (1) for determining the basis for gain were applied, the result would be a loss—($30,000 less $20,000). If the rule in paragraph (2) for determining the basis for loss were applied, the result would be a gain—($20,000 less $10,000). However, the rule in this paragraph provides that there is neither taxable gain nor loss.

   (5)  Determination of fair market value as of June 1, 1971, shall be as follows:

     (i)   If the property on which a taxpayer is reporting was not listed on an established market or exchange, the fair market value as of June 1, 1971, shall be the opening price on Tuesday, June 1, 1971. If the property was not traded on that day, the price of the last sale during the preceding week shall be the fair market value as of June 1, 1971, for computing gain or loss. If the property was not traded during the previous week or in the absence of an opening price for Tuesday, June 1, 1971, the average of the high and low price or the average of the bid and asked quotations on Tuesday, June 1, 1971, whichever is appropriate, shall be used to ascertain the fair market value as of June 1, 1971. When a return is filed involving property acquired prior to June 1, 1971, an explanation of the method utilized in computing the June 1, 1971, fair market value shall be attached to Schedule D.

     (ii)   If the property on which a taxpayer is reporting was not actively traded in an established market or exchange, the fair market value as of June 1, 1971, may be established through a bona fide, independent, written appraisal as of the date by a competent appraiser of recognized standing and ability. The value as established by the appraiser shall specifically exclude the value of improvements made subsequent to June 1, 1971. A copy of the appraisal shall be attached to Form PA-40 when filed. When an appraisal is utilized, an explanation of improvements made subsequent to June 1, 1971, including the date and cost of the improvements, shall be attached to Schedule D.

     (iii)   The following table illustrates the application of the rules for computing gain or loss as enumerated in this subsection. It may be used as a guide when securities or other nondepreciable assets are involved, assuming that no adjustments are necessary for capital additions or capital reductions.

 

 

Cost June 1,
1971
Value

Selling
Price 

Gain 

Loss
500 750 1,000 250 —
500 250 1,000 500 —
500 1,500 1,000 none none
500 100 50 — 450
500 25 50 — 450
500 1,000 50 — 450
   (6)  If the fair market value of the property was not ascertained as of June 1, 1971, by the methods enumerated in paragraph (5), the gain or loss shall be computed by subtracting from the sales price selling expenses and the historic or cost basis of the property and multiplying that figure by a fraction—the numerator of which is the number of full calendar months the property was held subsequent to June 1, 1971, and the denominator of which is the number of full calendar months in the taxpayer’s entire holding period for the property. When the proration is used, an explanation shall accompany Schedule D, setting forth for each asset the date and costs of acquisition and the date and costs of any capital improvements, both prior to and subsequent to June 1, 1971. Proration fractions utilized shall be included in the explanation. Paragraphs (1)—(5) do not apply when this paragraph is used.

     (i)   The application of this paragraph may be illustrated by the following examples:

       (A)   Taxpayer purchased his home on June 1, 1960, at a cost of $20,000. He sold the home on June 1, 1980, for $100,000. He incurred selling expense of $5,000. The taxable gain is computed by subtracting from the sale price of $100,000 selling expenses of $5,000, leaving a net sale price of $95,000. Next the $20,000 cost basis is subtracted from the net sale price of $95,000. This $75,000 gain is multiplied by the fraction of 108/240 resulting in a taxable gain of $33,750.

 

 

Source: http://www.pacode.com/secure/data/061/chapter103/s103.13.html

 

[Yardley CPA]

rfassett, Thanks!  Appreciate you posting and confirming.  Yes, warm and fuzzy...very fuzzy.