Question 1. Pedro borrowed $250,000 to purchase a machine costing $300,000. He l

1. Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

a. $0.

b. $45,000.

c. $163,000.

d. $208,000.

e. None of the above.

2. The bank forecloses on Lisa’s apartment complex. The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the property is $480,000, and the fair market value is $750,000. What is Lisa’s recognized gain or loss?

a. $270,000.

b. ($750,000).

c. $0.

d. ($480,000).

e. None of the above.

3. Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker’s commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton’s basis for the land and the improvements?

a. $1,350,000.

b. $1,378,000.

c. $1,385,000.

d. $1,413,000.

e. None of the above.

4. Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2014. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2014. What is Jamie’s adjusted basis at the date of the sale and the amount realized?

a. $370,000 adjusted basis; $661,400 amount realized.

b. $370,000 adjusted basis; $661,100 amount realized.

c. $370,000 adjusted basis; $665,200 amount realized.

d. $325,000 adjusted basis; $663,200 amount realized.

e. $325,000 adjusted basis; $694,000 amount realized.

5. Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions an

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