Reference no: EM136332

Q. 1. An investor buys a property for $1 million with 40% of the purchase price attributable to the land and the balance to a single structure. The purchaser incurs transaction costs equals to 5 percent of the purchase price (these must be capitalized). The investor then spends $400,000 to the rehabilitate the structure (she is entitled to no tax credits). Subsequently she claims $110,000 of the cost recovery allowances. She then sells the land but retains title to the building and a long-term leasehold interest in the land. The sale price is $600,000, including transaction costs, which equalled 10 percent of the selling price. What is the investor's adjusted tax basis in the remaining asset after accounting for all these transactions?

2. A residential rental property is acquired during the first month of the taxable year, at a total cost (including transaction costs) of $1,200,000. Of this amount, $200,000 is properly attributable to the land. Determine the annual depreciation allowance for the first year and for each of the ensuing nine years.

3. Assume that during the last month of the tenth year of ownership, the property in Problem 2 is sold for 1,500,000. Assume also that the seller incurs transaction costs equalling 6 % of the sales price. What is the amount of the gain or loss on the sale?

4. A 50,000 square foot parcel of land (which has equal value per square foot) is purchased by a developer who pays 10,000 cash takes title subject to an existing 70,000 first mortgage note that she assumes and agrees to pay, and sings a note and purchase-money mortgage for an additional 20,000 (transaction costs are zero) The developer constructs a building on the easternmost 25,000 square feet at a total construction cost of 75,000. The westernmost 25,000 square feet is improved with sewers, grading, and parking facilities at total costs of $18,000. The developer then borrows $100,000 from a mortgage lender and uses the loan proceeds to retire the existing first mortgage loan, the purchase - money mortgage note that was created when the land was purchased, and a short-term personal loan that was used to help finance construction. This is new $100,000 loan is secured by a new first mortgage on the easternmost 25,000 square feet of property, leaving the westernmost 25,000 square feet clear of all liens (all promissory notes call for interest at current market rates). At this point the developer sells the westernmost 25,000 square feet of property for $80,000, net of transaction costs. The developers also claims an $8,333 cost recovery (Depreciation) allowance on the building that she has constructed on the eastern-most 25,000 square feet or property. What is the developer's adjusted tax basis in this property after accounting for all of this activity.