Tax Research Problem
#1 Steve and Elaine Lostbucks have come to you for tax advice concerning the purchase of a condominium in Faulty Towers in Las Vegas for investment purposes. After reviewing the facts and alternatives below, prepare a memo outlining the tax effects of each alternative and recommend the strategy that will minimize their total tax liability. In your memo use references and citations to specific code sections or other supportive data.
1.Steve and Elaine are both 50 years old and anticipate that they will file a joint return have Adjusted Gross Income of $45,000 and no itemized deductions before considering any capital loss or deductions that will be generated by any of the alternatives. They are not real estate agents and this will be their first investment in investment real estate.
2. The purchase price of the condominium is $500,000 and the bank will finance $350,000 with an interest only payment of $3,000 per month. Property taxes will be $5,000 per year.
3. Due to the drastic drop in the Las Vegas real estate market, the condominium's market value is $400,000 and they will not to be able rent it.
4. They have made deposits of $150,000 to the developer and will lose $75,000 of those deposits if they back out of the transaction. They are considering the following alternatives: A. Back out of the transaction and forfeit $75,000 of their deposits. They are not real estate agents and this will be their first investment in investment real estate B. Back out of the transaction and forfeit $75,000 of their deposits. They are not real estate agents but have acquired 6 other condominiums for investment in Las Vegas which they are currently leasing to tenants. C. Purchase the condominium (assume the bank will still make the loan) and sell the property as soon as possible for $400,000. They are not real estate agents and this will be their first investment in investment real estate D. Purchase the condominium (assume the bank will still make the loan) and list the condominium for rent and sell the property after one year for $400,000. They are not real estate agents but have acquired 6 other condominiums for investment in Las Vegas which they are currently leasing to tenants. E. Assume they selected alternative D but only sold the condominium for $275,000 and were not able to pay the bank the $75,000 shortfall. What would be the nature i.e. ordinary loss, capital loss etc. and amount of their loss? Would the transaction cause them to recognize ordinary income due to the forgiveness of debt?