Understanding Luke's Recognized Gain or Loss on Building and Land

What is the amount and character of Luke's recognized gain or loss on the building and land?

Answer:

a. The amount and character of Luke's recognized gain on the building is $170,000

b. The amount and character of Luke's recognized gain on the land is $80,000

Explanation:

a. Calculating Luke's Recognized Gain or Loss on the Building:

In order to determine the amount and character of Luke's recognized gain or loss on the building, we need to consider the fair market value, cost of building, and depreciation expense.

The calculation is as follows:

Amount of gain or loss on building = (fair market value - cost of building) + depreciation expense

Amount of gain or loss on building = ($325,000 - $200,000) + $45,000 = $170,000

Therefore, Luke's recognized gain on the building is $170,000.

b. Calculating Luke's Recognized Gain or Loss on the Land:

To determine the amount and character of Luke's recognized gain or loss on the land, we need to consider the fair market value and the purchase price of the land.

The calculation is as follows:

Amount of gain or loss on land = (fair market value - purchase price)

Amount of gain or loss on land = ($210,000 - $130,000) = $80,000

Therefore, Luke's recognized gain on the land is $80,000.

In both cases, the character of the gain is Capital gain since interest is not considered in the calculation.