Question 1: Kareem bought a rental house in October 2001 for $250,000, of which $50,000 is allocated to the land and $200,000 to the building. Early in 2003, he had a tennis court built in the backyard at a cost of $5,000. Kareem has deducted $30,900 for depreciation on the house and $1,300 for depreciation on the court. In January 2006, he sells the house and tennis court for $400,000 cash.
a. What is Kareem’s realized gain or loss?
b. If an original mortgage of $75,000 is still outstanding and the buyer assumes the mortgage in addition to the cash payment, what is Kareem’s realized gain or loss?
c. If the buyer takes the property subject to the mortgage, what is Kareem’s realized gain or loss?
Question 2: Gayla owns a building (adjusted basis of $375,000 on January 1, 2006) that she rents to Len who operates a restaurant in the building. The municipal health department closed the restaurant for two months during 2006 because of health code violations. Under MACRS, the cost recovery deduction for 2006 would be $24,000. However, Gayla deducted cost recovery only for the 10 months the restaurant was open since she waived the rent income during the two-month period the restaurant was closed.
a. What is the amount of the cost recovery deduction that Gayla should report on her 2006 income tax return?
b. Calculate the adjusted basis of the building at the end of 2006.
Question 3: Nina owns a personal use boat that has a fair market value of $12,500 and an adjusted basis of $17,000. Nina’s AGI is $60,000. Calculate the realized and recognized loss if:
a. Nina sells the boat for $12,500.
b. Nina exchanges the boat for another boat worth $12,500.
c. The boat is stolen and Nina receives insurance proceeds of $12,500.
Question 4: Alton owns stock in Dove Corporation. His adjusted basis for the stock is $85,000.
During the year, he receives a distribution from the corporation of $65,000 that is labeled a return of capital (i.e., Dove has no earnings and profits).
a. Determine the tax consequences to Alton.
b. Assume instead that the amount of the distribution is $100,000. Determine the tax consequences to Alton.
c. Assume instead in (a) that the $65,000 distribution is labeled a taxable dividend
(i.e., Dove has earnings and profits of at least $65,000).