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a loan of $500,000 from a bank, which was secured by a first
mortgage. In a document from the loan officer to the bank’s loan
committee recommending approval of the loan, the loan officer
stated:
Although property in question is an old one and in
considerable need of repair, the property should be
desirable when rehabilitated and will have substantial
value.
With the potential rental income combined with the rent
saving of Julicher, cash flow should be adequate to
service the debt.
Petitioner used the balance of the loan over the purchase price
to make repairs to the buildings on the Property. Petitioner did
not increase his basis in the buildings by the amount of these
repairs. Petitioner bought the Property because he had lost his
lease on a previous location where his corporation conducted its
business, and the buildings on the Property were suitable for use
in the corporation’s business.
Petitioner allocated $107,759 of the purchase price to the
land and $285,619 to the buildings. Petitioner took depreciation
deductions on the buildings beginning in April 1988 using a basis
for depreciation of $285,619, the straight-line method, and a
recovery period of 31.5 years.3 Through 1993, petitioner had
2(...continued)
petitioner as the only purchaser.
3 Petitioner did not allocate basis individually among the
(continued...)
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