ssq8 - Chapter 8 Self-Study Questions 44. a. Rocco owns a...

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Chapter 8 Self-Study Questions 44. Rocco owns a piece of land as investment property. He acquired the land in 1984 for $18,000. On June 1, 2007, he sells the land for $80,000. As part of the sale, the buyer agrees to pay all of the property taxes ($3,600) for the year. a. What is Rocco’s gain on the sale of the land? Because the buyer paid the real estate tax, the sale price is increased by the amount of Rocco’s share of the real estate tax liability assumed by the buyer of the land. The allocation of the real estate taxes is based on the number of days Rocco owned the property during the year (151 days from January 1 to May 31), resulting in the buyer effectively paying Rocco an additional $1,489 [$3,600 x (151 ÷ 365)] for the land. The sales price of the land, after adjustment for the real estate tax, is $81,489 ($80,000 + $1,489). Rocco has a gain of $63,489 on the sale of the land: Amount realized ($80,000 + $1,489) $ 81,489 Adjusted basis (18,000 ) Gain on sale $ 63,489 b. What amount of the property taxes can Rocco deduct? What amount can the buyer deduct? Rocco is only allowed to deduct the taxes paid for the portion of the year he owned the land. This allocation is based on the number of days he owned the property during the year (151 days from January 1 to May 31), resulting in a deduction of $1,489 [$3,600 x (151 ÷ 365)]. Likewise, the buyer is only allowed to deduct the taxes for the portion of the year (June 1 to December 31). The buyer can deduct $2,111 ($3,600 - $1,489) of property taxes. c. What is the buyer’s basis in the land? The buyer is allowed to increase their basis in the land by the amount of real estate taxes paid on behalf of the seller. Therefore, their basis in the land is $81,489 ($80,000 + $1,489). Instructor’s Note: Although technically, the allocation is based on the number of days, using 5 months results in approximately the same deduction $1,500 [$3,600 x (7 ÷ 12)]. The $11 difference ($1,500 - $1,489) is due to rounding. 57. Trevor is an English professor at Clayton College. His adjusted gross income for the year is $58,000 including $5,000 he won at the racetrack. Trevor incurs the following miscellaneous expenses during the year: Investment advice $ 550 Subscriptions to academic journals 240 Dues to academic organizations 275 Attorney fee for tax advice relating to his divorce 325 Parking at the university 100 Safe-deposit box 75 Gambling losses 450 Sport coats worn exclusively at work 750 What is Trevor’s allowable miscellaneous itemized deduction? Trevor is not allowed to deduct his parking at the university, or his sports coats. Trevor’s personal decision not to wear the sport coats outside of work does not make the the cost of the coats a deductible business expense. The amount of the legal fees paid for tax advice relating to his divorce is deductible assuming the bill specifies how much of the fee is for tax advise. The gambling losses (to the extent of winnings) are not a miscellaneous itemized deduction but are deductible as a separate itemized deduction. Trevor's total allowable itemized deductions before the 2%
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This note was uploaded on 04/18/2008 for the course ACCT 3013 taught by Professor Murphy during the Spring '08 term at Oklahoma State.

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ssq8 - Chapter 8 Self-Study Questions 44. a. Rocco owns a...

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