24. Harold conducts a business with the following results for the year:
Depreciation on car 3,960
Operating expenses of car 3,100
Amortization of intangibles 680
Harold estimates that due to a depressed real estate market, the value of land owned by the business declined by $5,200.
a. Calculate the effect of Harold’s business on his AGI.
b. How would your answer in part (a) change if the activity was a hobby?
25. LO.3 Sarah owns a vacation cabin in the Tennessee mountains. Without considering the cabin, she has gross income of $65,000. During the year, she rents the cabin for two weeks for $2,500 and uses it herself for four weeks. The total expenses for the year are $10,000 mortgage interest; $1,500 property tax; $2,000 utilities, insurance, and maintenance; and $3,200 depreciation.
a. What effect does the rental of the vacation cabin have on Sarah’s AGI?
b. What expenses can Sarah deduct, and how are they classified (i.e., for or from AGI)?
26. LO.3 Under what circumstances may a taxpayer deduct a rental loss associated with a vacation home?
27. LO.3 Karen and Andy own a beach house. They have an agreement with a rental agent to rent it up to 200 days per year. For the past three years, the agent has been successful in renting it for 200 days. Karen and Andy use the beach house for one week during the summer and one week during Thanksgiving. Their daughter, Sarah, a college student, has asked if she and some friends can use the beach house for the week of spring break.
Advise Karen and Andy how they should respond, and identify any relevant tax issues.
28. LO.3 Hank was transferred from Phoenix to North Dakota on March 1 of the current year. He immediately put his home in Phoenix up for rent. The home was rented May 1 to November 30 and was vacant during the month of December. It was rented again on
January 1 for six months. What expenses, if any, can Hank deduct on his return? Which deductions are for AGI, and which ones are from AGI?
29. LO.3 Ray loses his job as a result of a corporate downsizing. Consequently, he falls behind on the mortgage payments on his personal residence. His friend Ted would like to make the delinquent mortgage payments for him.
a. Could the payments be structured so that Ray can deduct the mortgage interest?
b. Could the payment arrangement deny both Ray and Ted amortgage interest deduction?
c. Could the payments be structured so that Ted can deduct the mortgage interest?
30. LO.3 Edna incurs various legal fees in obtaining a divorce. Which types of expenses associated with the divorce are deductible by Edna, and which are not?
31. LO.3 Ella owns 60% of the stock of Peach, Inc. The stock has declined in value since she purchased it five years ago. She is going to sell 5% of the stock to a relative. Ella is also going to make a gift of 10% of the stock to another relative. Identify the relevant tax issues for Ella.