ACC/307 ACC307 ACC 307 WEEK 10 Chapter 14 Homework

Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $400,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $700,000. (Leave no answer blank. Enter zero if applicable.)

a.

What amount of gain on the sale of the home are the Pratts required to include in taxable income?

b.

Assume the original facts, except that Steve and Stephanie lived in the home until January 1 of year 3 when they purchased a new home and rented out the original home. They finally sell the original home on June 30 of year 5 for $700,000. Ignoring any issues relating to depreciation taken on the home while it was being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?

c.

Assume the same facts as in part (b), except that the Pratts lived in the home until January of year 4 when they purchased a new home and rented out the first home. What amount of realized gain on the sale of the home will the Pratts include in taxable income if they sell the first home on June 30 of year 5 for $700,000?

d.

Assume the original facts, except that Stephanie moved in with Steve on March 1 of year 3 and the couple was married on March 1 of year 4. Under state law, the couple jointly owned Steve’s home beginning on the date they were married. On December 1 of year 3, Stephanie sold her home that she lived in before she moved in with Steve. She excluded the entire $50,000 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?

Javier and Anita Sanchez purchased a home on January 1, 2015, for $500,000 by paying $200,000 down and borrowing the remaining $300,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanchezes would itemize deductions even if they did not have any deductible interest. The Sanchezes’ marginal tax rate is 30 percent.

a.

What is the after-tax cost of the interest expense to the Sanchezes in 2015?

b.

Assume the original facts, except that the Sanchezes rent a home and pay $21,000 in rent during the year. What is the after-tax cost of their rental payments in 2015?

c.

Assuming the interest expense is their only itemized deduction for the year and that Javier and Anita file a joint return, have great eyesight, and are under 60 years of age, what is the after-tax cost of their 2015 interest expense?

Jenae and Terry Hutchings own a parcel of land as tenants by entirety. That is, they both own the property but when one of them dies the other becomes the sole owner of the property. For nontax reasons, Jenae and Terry decide to file separate tax returns for the current year. Jenae paid the entire $3,000 property tax bill for the land. How much of the $3,000 property tax payment is each spouse entitled to deduct in the current year?

Deductible Jenae property tax

$3,000

Deductible Terry property tax

$0

Alexa owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:

  Insurance

$2,000  

  Mortgage interest

6,500  

  Property taxes

2,000  

  Repairs & maintenance

1,400  

  Utilities

2,500  

  Depreciation

14,500  

During the year, Alexa rented out the condo for 100 days. She did not use the condo at all for personal purposes during the year. Alexa’s AGI from all sources other than the rental property is $200,000. Unless otherwise specified, Alexa has no sources of passive income.

Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions:

a.

What effect does the rental activity have on her AGI for the year?

b.

Assuming that Alexa’s AGI from other sources is $90,000, what effect does the rental activity have on Alexa’s AGI? Alexa makes all decisions with respect to the property.

c.

Assuming that Alexa’s AGI from other sources is $120,000, what effect does the rental activity have on Alexa’s AGI? Alexa makes all decisions with respect to the property.

d.

Assume that Alexa’s AGI from other sources is $200,000. This consists of $150,000 salary, $10,000 of dividends, and $25,000 of long-term capital gain, and net rental income from another rental property in the amount of $15,000. What effect does the Cocoa Beach Condo rental activity have on Alexa’s AGI?

Note that the property is a nonresidence with rental use property.

Alisha, who is single, owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. She purchased the home at the beginning of year 1 for $400,000. Since she purchased the home and moved into it she has been able to deduct $10,000 of depreciation expenses to offset her consulting income. At the end of year 3, Alisha sold the home for $500,000.

What is the amount of taxes Alisha will be required to pay on the gain from the sale of the home? Alisha’s ordinary marginal tax rate is 30 percent.