. Real estate taxation is subject to all the same Internal Revenue Code as say insurance companies.
2. C Corporations are the preferred way to own real estate.
3. Kick-backs are allowed as a deduction, when:
a. The kickbacks are illegal
b. The kickbacks are ordinary and necessary
c. Kick-backs are never deductible
d. The kickbacks are in the ordinary course of business
e. None of the above
4. All real estate companies, whether partnerships, C or S Corporations or sole-proprietorships must be on the accrual basis of accounting.
5. For real estate, the taxpayer cannot elect to pick MACRS or Straight-line depreciation.
6. For real property passive activity losses, an individual can only take passive losses against passive income.
7. In the following transaction, the taxpayer’s gain is:
Sales price $150,000
Purchase price 50,000
Depreciation taken, all post 97 30,000
- Capital gain $130,000
- Capital gain $100,000 – Ordinary income $30,000
- Ordinary income $130,000
- None of the above
8. An individual can offer a perspective purchaser a zero interest loan, and he or she will not be required to apply the below market interest rules of the I.R.C.
9. An individual, pursuant to a divorce decree, transfers ownership in his solely owned apartment building to his wife. The FMV of the property is $350,000, with an associated debt of $50,000. He purchased the property 10 years ago for $100,000 and has depreciated the property 40,000. He will have the following gain:
- Forgiveness of indebtness $50,000, gain on the property of $290,000
- There is no gain or loss
- Forgiveness of indebtness $50,000
- None of the above
10. A meat company needs to seal their basement after it comes the their attention that oil is seeping up from the ground since a new oil company next store started drilling for oil. The company can deduct the costs of sealing as an ordinary and necessary business expense.
Section 2: If you use excel, please copy the excel section into this document.
A developer purchases a piece of property for $1,000,000. She budgets that there will be $300,000 in improvements to be able to start selling the lots. The land is broken down into 100 equal lots, i.e. equal size, dimensions and worth. She expects to see the lots for $20,000 each. In year 1 she sells 25 lots. In year two the overall improvement costs raise to $400,000, or $100,000 over budget. 25 additional lots were sold in year two. Please allocate the costs and advise, what is the taxable income for year 1 and 2, noting there are no other expenses outside the allocation of costs.
Two parties seek to perform a like-kind exchange. The first party has real property with a FMV of $350,000 and a loan of $50,000. She purchased the property for $150,000 in 1996 and has since depreciated the property by $50,000. The second party has a piece of real property with a FMV of $250,000. The second party is a partnership who purchased the property for $100,000 and has since depreciated the property by $30,000. The partnership purchased the property in 2000. As part of the transaction, party 1 will transfer to the partnership the real property, plus the associated debt, for the partnership’s real property plus $50,000 in cash.
Please describe and compute the tax consequences to both parties.
Fact Scenario – Section 3. Please put your answer in the form of a client letter.
Rachel, an earth witch, got a job protecting a former acquaintance. She also has two other members that work with her, a living vampire names Ivy and a fairy named Jenks. The three seek to purchase a church in the outskirts of town to start their business, i.e., protection, counter spells and detective works on supernatural beings. The church is an Old Catholic church, with a rectory, worship area and odd nooks and crannies. The three will use the rectory for a living area, since it has a kitchen and other rooms for sleeping, etc. Yes, all three will be living within the church.
The worship area will be converted into the office. The square footage breakdown is about 1/3rd rectory and 2/3rd worship area. The cost of the church is $250,000. The three currently work together but have no formal agreements, etc. Rachel and Ivy have $10,000 each to put down as a deposit and Jenks does not have anything to put down. All three want to be as equitable as possible in any arrangement.
Currently the business is expected to net around $100,000 each for Rachel, Ivy and Jenks. However, they do expect to have some unexpected costs, so the business could potentially run at a loss.
Please advise the three as to the best way to proceed in purchasing the church, the tax implications and potentially the best way to proceed with their business.