Oregon Tax Consultants Practice Exam

What do you do when you buy property and assume a loan?

1. Ignore the loan

2. Add the loan amount to the basis

3. Deduct the amount of the loan

4. Report the loan separately

The correct answer is: Add the loan amount to the basis

When purchasing property and assuming a loan, adding the loan amount to the basis of the property is the correct approach. The basis of a property represents the total investment you've made in it, which includes not only the purchase price but also any additional costs associated with the acquisition, such as legal fees, inspection costs, and improvements made to the property. When you assume a loan as part of the transaction, that liability represents a financial stake in the property and thus increases your overall basis. This higher basis can be beneficial for tax purposes because it can reduce capital gains taxes if you decide to sell the property in the future. The other options do not reflect tax principles correctly. Ignoring the loan could lead to misunderstandings about the total financial commitment involved in the property purchase. Deducting the amount of the loan is not permissible since loans themselves are not considered expenses for tax deduction purposes; only the interest paid on the loan can typically be deducted, if applicable. Reporting the loan separately might not be necessary for tax purposes, as the assumption of the loan is inherently tied to the property and contributes to your investment in it. Thus, focusing on the loan’s impact on the basis accurately reflects the financial reality of the transaction.