California Real Estate Practice Exam

A loan of $200,000 is placed on a fourplex which has a tax basis of $150,000. Which of the following applies?

1. The basis is decreased to the amount of the loan

2. The basis is increased by the amount of the loan

3. The basis is increased to the extent that the loan exceeds the basis

4. There is no tax due on the transaction

The correct answer is: The basis is decreased to the amount of the loan

In this scenario, understanding the relationship between the loan amount and the property’s tax basis is crucial. The tax basis of a property generally represents the value assigned to the property for tax purposes, which includes the purchase price and certain additional costs associated with acquiring the asset. When a loan is placed on a property, it does not inherently affect the tax basis of that property directly. The tax basis remains its original amount unless there are capital improvements or other adjustments made. Therefore, the basis of the fourplex remains at $150,000 despite the loan of $200,000 being placed on it. Consequently, the correct interpretation is that the basis does not change with the amount of the loan. The basis does not decrease to the loan amount because loans are liabilities, not part of the asset’s value for tax basis purposes. Thus, the proper conclusion is that while the loan amount is greater than the basis, it does not alter the established basis of the property itself.