Elaine and Steve 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 every alternative and recommend the strategy that may minimize their total tax liability.
1.Elaine and Steve are both 50 years old and anticipate that they may file a joint return have Adjusted Gross Income of $45,000 and no itemized deductions before considering any deductions or capital loss that will be prepared by any of the alternatives. They are not real estate agents and this may be their first investment in investment real estate.
2. The purchase price of the condominium is $500,000 and the bank can finance $350,000 with an interest only payment of $3,000 per month. Property taxes can 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 can not to be able rent it.
4. They have made deposits of $150,000 to the developer and may lose $75,000 of those deposits if they back out of the transaction.