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A 50,000 square foot parcel of land (which has equal value per square foot) is purchased by a developer who pays 10,000 cash takes tittle subject to an existing 70,000 first mortgage note that she assumes and aggrees to pay, and sings a note and purchase-money mortgage for an additinal 20,000 (transaction costs are zero) The developer constructs a building on the easternmost 25,000 square feet at a total construction cost of 75,000. The westernmost 25,000 square feet is improved with sewers, grading, and parking facilities at a total costs of $18,000. The developer then borrows $100,000 from a mortgage lender and uses the loan proceeds to retire the existing first mortgage loan, the purchse - money mortgage note that was created when the land was purchased, and a short-term personal loan that was used to help finance construction. This is new $100,000 loan is secured by a new first mortgage on the easternmost 25,000 square feet of property, leaving the westernmost 25,000 square feet clear of all liens (all promissory notes call for interest at current market rates). At this point the developer sells the westernmost 25,000 square feet of property for $80,000, net of transaction costs. The developers also claims an $8,333 cost recovery (Depreciation) allowance on the building that she has constructed on the eastern-most 25,000 square feet or property. What is the developers's adjusted tax basis in this property after accounting for all of this activity.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M940334

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