Outline_7B_Real_estate_sales_students

Outline_7B_Real_estate_sales_students - Outline 7B April...

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Outline 7B April 16, 2011 Real estate sales Chapter 14: Basis (Section 14.1) ; Also pages Chapter 14 pages 20 middle to 14-23 bottom (Conversion of property from personal use to business use) Chapter 8, Page 5 only (Section covering: Cost recovery for personal use assets converted to business) Chapter 5: Section 5.16 Income from discharge of indebtedness Realized Gains or Losses -- Section 1004 I. Gain/loss recognition and basis Rules and Holding period for property that is purchased a. Cost basis b. QUESTION: Warren sold a rental house which he had purchased on 1/1/1996 for $200,000 (Land $50,000, Building $150,000). He sold the property to Sally on 9/1/2009. Sally used the house as her personal residence. She paid $600,000 in cash. On 9/1/2009 the land had a FMV of $100,000 and the building had a FMV of $500,000. (He sold no other 1231 property during the year). a.i. What is the recognized gain to Warren? a.ii. What is the character of the gain? a.iii. What is the basis of the property to Sally? b. ANSWER: Amount Realized 600,000 Cost Basis of house 200,000 Less 2006 Depr. 2.461% x 150,000 3692 2007 Depr. 2.564% x 150,000 3846 2008 Depr. 2.564% x 150,000 3846 2009 Depr 2.564% x 150,000 x 8.5÷12 2724 Accumulated Depr. 14,108 Adjusted basis 185,892 Realized gain 414,108 Recognized gain 414,108 Character of gain 1231 gain 414,108 Unrecaptured depreciation ( 14,108 ) x .25 3,525 Long term capital gain 400,000 x .15 60,000 Total tax 63,525
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QUESTION: Assume instead he sold it to Terrance on 9/1/2009. Terrance paid $20,000 in cash and took out a mortgage for $580,000. Terrance used the property as rental property. c.i. What is the basis of the property to Terrance? c.ii. Can Terrance depreciate the building? c.iii. Does Terrance depreciate $20,000 or $500,000? c.iii.1. Is there any limit on the amount of depreciation? c.iii.2. Is there any limitation on net rental income to Terrance? Net rental loss d. QUESTION: Wayne sold rental property that he owned (He sold no other 1231 property during the year). On 1/1/97 the purchase price was $500,000. The value of the land was $100,000 and of the building was $400,000. He made a down-payment of $150,000 and borrowed $350,000. On 4/1/2001 he added a swimming pool and hot tub for $80,000. Prior to the sale he had paid off $25,000 of the mortgage. He sold the rental house on September 1, 2009. Wayne incurred $25,000 in selling expenses. In addition he paid a painter $5000 to paint the rental property prior to sale. The purchaser assumed the mortgage and paid him an additional $150,000 in cash. What is Wayne's gain for 2009? ANSWER: Cash 150,000 Mortgage relieved of 325,000 Less selling expenses < 25,000> Amount Realized 450,000 Cash 150,000 Mortgage Payable 350,000 Cost Basis of house 500,000 Cost basis of pool and tub 80,000 Total basis of house 580,000 *Depreciation on house 124,110 *Depreciation on pool and tub 42,184 Accumulated Deprecation 166,294 Adjusted basis 413,706 Realized Gain 36,294 Less excluded gain
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Outline_7B_Real_estate_sales_students - Outline 7B April...

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