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Student Question of the Week: Basis in Property Transactions

Student Question from: Katy U.
Course:  Income Tax

Student Question:

On the adjusted basis portion in the question below – why is the $25,000 not included? Isn’t that a commission? I thought you are supposed to include the commission or other similar costs.

Nick purchased an office building in Year 1 for $150,000 and sold it ten years later for $350,000. He also had to pay a real estate broker $25,000 for listing and selling the property. In the ten years Nick owned the building, he depreciated it $5,000 per year and he made improvements totaling $65,000.

Adjusted Basis
Nick’s adjusted basis in the property in Year 11 would be calculated as follows.

Original basis:


Capital additions:


Capital returns:



Adjusted basis = $165,000

Instructor Response:

Good question, Katy.  You are correct that, when appropriate, the commission should be included.  However, it is not included here because we are only looking at the time frame before he sold it.  The $25,000 is part of the price he paid when he sold it.  Had he paid $25,000 to an agent when he purchased the building, you would include it. But because we are calculating the basis at the time of sale, you would not include that in the calculation.  Later, if we were to calculate the realized gain, you would absolutely include it then.