Basis Allocation for Tax Basis

Lesson:

What happens when someone buys more than one thing at a time?

A building and the land it sits on, for instance, are often purchased bundled together in a single transaction.

So when multiple items are purchased together, how much of the purchase price is allocated to each item's basis?

The simplest thing to do is to allocate the basis proportionally to the fair market value of each item.

In other words, if the land is worth more than the house, then it would make sense that it would be allocated more of the basis.

You're a tax accountant, trying to calculate the basis of a set of items purchased by your client.

This is what you've been told:

  • The land and property were purchased together for $248.
  • The land's fair market value is $211.
  • The building's fair market value is $515.
What is the basis for the land?

Answer:

  • The basis for the land is $72.08.

Explanation:

  1. The first step is to figure out the total fair market value of all of the items purchased.
    TOTAL FAIR MARKET VALUE = FAIR MARKET VALUE OF LAND + FAIR MARKET VALUE OF BUILDING
  2. Let's plug in the numbers
    $726 = $211 + $515
  3. Now let's figure out the fraction of fair market value of the land.
    PERCENT TO ALLOCATE TO LAND = FAIR MARKET VALUE OF LAND / TOTAL FAIR MARKET VALUE
  4. Let's plug in the numbers
    29.06% = $211 / $726
  5. Finally, we multiple the percent to allocate by the total purchase price.
    ALLOCATION = PERCENT TO ALLOCATE TO LAND * PURCHASE PRICE
  6. Let's plug in the numbers
    $72.08 = 29.06% * $248
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