Federal Income Tax Law

Q1 – Individual A sells a rental building, its office equipment, furniture and fixtures, and its land to Individual B. Individual A realizes gain on the sale of the building, equipment, furniture and fixtures and land. Individual A rented the building to commercial tenants.

What is the character of the gain realized?

Q2. – Barb owns Williams Tower, an apartment building. Barb’s adjusted basis in Williams is $400,000 and it is subject to a mortgage of $260,000. Dan owns Portland Arms, a commercial office building. It is worth $800,000 and is subject to a mortgage of $350,000. Dan’s adjusted basis in Portland is $400,000.
Both Barb and Dan acquired their properties 5 years ago and depreciation was straight-line.
Barb and Dan exchange properties and, in addition, Barb transfers antique jewelry, worth $10,000 in which she had a basis of $2,000 to Dan. Barb inherited the jewelry from her mother many years ago. Each assumes the others mortgage (with the consent of the lenders).
a) What are the tax consequences of this exchange to Barb?
1) List of authorities relied upon:
2) Response:
b) What are the tax consequences of this exchange to Dan?
1) List of authorities relied upon:
2) Response:

Q3. – There are numerous provisions in the Code that treat transactions between related parties differently than transactions between unrelated parties. Note two provisions that would alter the tax consequences of transactions based on relationships. Provide a brief description of how each provision works and what parties are affected.
Discuss the authorities within the body of the response itself.
a) Provision 1 Response:
b) Provision 2 Response:
c) Provision 3 Response:

PLEASE SEE BELOW SAMPLE HOW ANSWER ABOVE QUESTIONS.
MUST ONLY USE APPROPRIATE AUTHORITY TO CITE IS CODE, REGULATIONS, CASES AND RULINGS. Do not cite to anything else.

1) Peter Piper purchased a parcel of land for $20,000 and constructed an apartment building on it at a cost of $380,000 (total basis in land and building = $400,000). He paid the entire purchase price and construction costs with the proceeds of a nonrecourse loan that was secured by a mortgage on the property. Two years later, when Peter’s basis in the land and apartment building was $360,000 (due to $40,000 of depreciation on the building), the fair market value of the land and building was $500,000 and the outstanding balance on the mortgage was still $400,000, Peter sold the land and building, subject to the mortgage, to Betty Boop for $100,000 in cash. As part of the transaction, Betty assumed the mortgage.

a) How much gain or loss must Peter recognize? What is its character? What is Betty’s basis in the property?

The original mortgage holder (Peter) has been relieved of a duty to pay. However, because the mortgage was not forgiven by the bank, this is not a cancellation of debt issue (neither Code section 61(a)(12) nor 108 apply), rather, this is a sale transaction.

Peter’s Gain: Amount realized = $500,000 ($100K cash + $400K mortgage relief per Treas. Reg. section 1.1001-1 and – 2) less adjusted basis of $360,000 = $140,000. Also, see Tufts and Code section 7701(g) regarding the requirement that debt relief be included in amount realized, even if the debt is nonrecourse.

Character: Because the building and land was held for more than a year in a trade or business (and the building was subject to depreciation), the $100,000 gain is generally Code section 1231 gain. Although there was depreciation, neither Code section 1250 nor Code section 291 applies to recharacterize the gain as ordinary. Code section 1250 applies only if depreciation is “accelerated” and applies only to real property purchased before 1987. Peter purchased the property two years ago. Code section 291 applies to corporations, and Peter is a person.

Betty’s basis = $500,000. Per Code section 1012, basis is cost. Betty paid $100,000 in cash and took the property subject to a $400,000 mortgage. As discussed above, debt relief is treated as sales proceeds under Code section 1001 and its Regulations. As such, the debt assumption by the buyer creates basis.

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