Car Co.is selling its land and building to Truck Co.for $340,000 (Land $200,000; Building $140,000).These values have not been officially appraised, and Truck Co.thinks that the land is only worth $150,000 and the building is worth $190,000.(Car Co.originally paid $100,000 for the land and constructed the building for $150,000.The UCC on the building is currently $130,000.) Which of the following statements is TRUE based on these facts?
A)Future CCA will be higher for Truck Co.if Car Co.'s terms are accurate
B)Car Co.will recognize higher net capital gains if Truck Co.'s terms are accurate
C)Car Co.will recognize higher recapture if Truck Co.'s terms are accurate.
D)The allocation of the costs is irrelevant for tax purposes as the total price is the same under both sets of terms.

Question

Quizplus · Accepted Answer

If Truck Co.'s terms are accurate, Car Co. will have to recapture a larger amount of CCA (capital cost allowance) on the building. This is because the UCC (undepreciated capital cost) on the building is currently $130,000, but according to Truck Co.'s valuation, the building is only worth $190,000. Therefore, if Car Co. sells the building for $140,000, they will have to recapture the difference between the UCC and the sale price, which is $10,000. If Truck Co.'s valuation is accurate, the recapture amount would be higher ($40,000) since the building is valued at $190,000 instead of $140,000. The allocation of costs is relevant for tax purposes because it affects the amount of recapture that Car Co. will have to report.

Car CoIs Selling Its Land and Building to Truck Co