Chapter 8 Self-Study Questions
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.
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
365)] for the land.
price of the land, after adjustment for the real estate tax, is $81,489 ($80,000
Rocco has a gain of $63,489 on the sale of the land:
Gain on sale
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
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.
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
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
The $11 difference ($1,500
$1,489) is due to rounding.
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.
incurs the following miscellaneous expenses during the year:
Subscriptions to academic journals
Dues to academic organizations
Attorney fee for tax advice relating to his divorce
Parking at the university
Sport coats worn exclusively at work
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%