Setting Sun Partnership purchased a business, FamilyDry Cleaners, for $750,000. The acquired Family DryCleaners assets consisted of the following:
• $50,000 in cash,
• Equipment with a fair market value of $200,000, and
• Land and building with a fair market value of$450,000.
For real estate tax purposes, the city assessed the value of the land at $100,000 and the building at $200,000.The buyer and seller did not enter into an allocation agreement for this transaction. What basis must Setting Sun Partnership use for the land, building, and intangible asset “goodwill”?
A. Land $100,000, Building $200,000, and Goodwill$150,000
B. Land $150,000, Building $300,000, and Goodwill$0
C. Land $150,000, Building $300,000, and Goodwill$50,000
D. Land $100,000, Building $350,000, and Goodwill$50,000
The answer is (C).
pg. 4 Publication 551 Basis of Assets
- Land and Buildings
- ...Figure the basis of each asset by multiplying the lump sum (450,000 FMV) by a fraction. The numerator is the FMV or assessed value for real estate tax purposes of that asset and the denominator is the FMV or assessed value of the whole property at the time of purchase. In this case the basis for land = 100,000/300,000 [200,000+100,000] * 450,000 and the basis for the land is 200,000/300,000 * 450,000 which both equals 150,000 and 300,000 respectively.
Now to determine the value of goodwill add the value of the tangible assets acquired in the exchange (cash, equipment, land and building) and subtract it by the total amount that Sun Partnership paid for Family Dry Cleaners, 750,000 - (50,000+200,000+450,000)... 750,000-700,000 = 50,000