Problem
David and Sheba's divorce become final six years ago, today. David was the sole owner of a rental property acquired before the marriage. The divorce decree required David to transfer ownership of the rental property to Sheba within five years of the date of the order with a new roof installed, which must have a 30-year guarantee. Since the installation and warranty cost him $25,000, David delayed the transfer until April 10 of the tax year when the new roof was placed in service. His adjusted basis in the rental property before the roof was $85,000. His rental income prior to the transfer was $5,000, but he thinks he should be able to claim a loss resulting from the transfer to his former spouse. Which of the following correctly describes how to report David's rental income or loss as well as the gain or loss on the rental property transfer, and what is Sheba's basis in the rental property received?