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Mr. RH purchased 30 acres of undeveloped ranch land 10 years ago for $935,000. He is considering subdividing the land into one-third-acre lots and improving the land by adding streets, sidewalks, and utilities. He plans to advertise the 90 lots for sale in a local real estate magazine. Mr. RH projects that the improvements will cost $275,000 and that he can sell the lots for $20,000 each. He is also considering an offer from a local corporation to purchase the 30-acre tract in its undeveloped state for $1.35 million. Assuming that Mr. RH makes no other property dispositions during the year and has a 35 percent tax rate on ordinary income and a 15 percent
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PRINCIPLES OF TAXATION F/BUS...(LL)
- Ms. Brown purchased a property consisting of one acre of land and a building for $100,000 five years ago. She obtained an $80,000 mortgage loan from ABC Bank at that time. The building was very old and Ms. Brown has just had it torn down. She now wants to build a new building. Ms. Brown hopes to finance construction with ABC Bank and will call them soon to discussfinancing the new project. How will ABC Bank evaluate the possibility of making another loan to Ms. Brown?arrow_forwardGlen Campbell owns a small office building adjacent to an airport. He acquired the property 10 years ago at a total cost of $608,000—that is, $70,000 for the land and $538,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, and so Campbell is unsure whether he should keep it or sell it. His alternatives are as follows: a. Keep the property. Campbell's accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Campbell makes a $13,450 mortgage payment each year on the property. The mortgage will be paid off in eight more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $80,700 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another…arrow_forwardMr. Smith acquired a property consisting of one acre of land and a two-story building five years ago for $100,000. He also obtained an $80,000 mortgage loan from ACE Bank to provide financing to complete the purchase. This year, Mr. Smith constructed another building on the property with his own funds at a cost of $20,000. Mr. Smith has decided after completing the building to approach Duce Bank to borrow and mortgage the new building with a $16,000 loan. Is Duce Bank likely to provide the $16,000 in financing? What other options may Mr. Smith have to consider?arrow_forward
- One of Courtney’s clients was interested in building a shopping center on a tract of land she owned in Lincoln County. Courtney inherited the property from her uncle when he died on June 6, 1999. At that time, the land was valued at $40,000. It has since been rezoned for commercial use and has a current value of $200,000. On February 10, 2019, Courtney exchanged the Lincoln parcel for a similar tract in Minnehaha County worth $190,000 and cash of $10,000. On September 2, 2019, Courtney sold a tract of land in McCook County to a farmer who owned the adjoining property. The land was inherited from the same uncle who died in 1999 and was valued at $30,000 on June 6, 1999. Under the terms of the sale, Courtney received cash of $20,000 and a note receivable to be paid in four equal installments at 1-year intervals from the date of sale. Each note calls for the payment of $25,000 plus simple interest of 8%. To the extent allowed by law, Courtney wants to defer recognition of gain for as…arrow_forwardPat is a real estate developer. A few years ago, Pat purchased Elysian Fields Farm for $1,100,000. The property included 120 acres of undeveloped land on which there was a small lake plus three acres that included a beautiful farmhouse and a few barns. At first, Pat had only been interested in the undeveloped land. However, rather than sell the 120 acres of undeveloped land to Pat for $800,000, the original owner was only interested in selling the entire estate, for $1,100,000. Pat quickly agreed to the counterproposal, and after the deal had closed, Pat immediately went to work improving Elysian Fields. Pat obtained approval to subdivide the land into 60 two-acre plots and the three-acre farmhouse lot. Pat was quickly able to sell the three-acre farmhouse lot for $300,000. So far, Pat has sold all 10 two-acre lots with lake frontage for $150,000 each and 10 of the other 50 two-acre lots for $30,000 each. How much gain has Pat realized? What is the gain on the sale of all 10 lakefront…arrow_forwardMiguel and Patricia recently sold some land they owned for $200,000. They received the land five years ago as a wedding gift from Miguel's Aunt Sela. Aunt Sela purchased the land many years ago when the property was worth $20,000. Aunt Sela had previously given the couple $25,000 as a gift at their wedding shower. At the date of the gift, the property was worth $100,000 and Aunt Sela paid $40,000 in gift tax. What is the long term capital gain on the sale of the property? A $42,400 B. $52,000 C. $92,400 D. $148,000arrow_forward
- George is the owner of numerous classic automobiles. His intention is to hold the automobiles until they increase in value and then sell them. He rents the automobiles for use in various events (e.g., antique automobile shows) while he is holding them. In 2020, he sold a classic automobile for $1,500,000. He had held the automobile for five years, and it had a tax basis of $750,000. Assuming a rate of return of 7%, how much would he have had to invest five years ago (instead of putting $750,000 into the car) to have had $1,500,000 this year? The present value factor for 5 years at 7% is .7130.$arrow_forwardColin McGregor and his wife Alice own a house in Kelowna as well as a condo at Big White. They purchased the house in Kelowna in 1997 for $270,000 and the condo in 2012 for $190,000. Both properties have been used exclusively by the McGregors. Early in 2021 the McGregors retired and put both properties up for sale. The condo sold in April for $420,000 and the house sold in July for $750,000. Determine the minimum capital gain that must be reported on the sale of the two properties.arrow_forwardBrooke is evaluating two alternatives for improving the exterior appearance of her Victorian-style house that she is remodeling inside. She plans to keep this as her home for 20 more years. The house can be completely painted at a cost of $16,000. The paint is expected to remain attractive for 5 years, at which time repainting will be necessary. Every time the building is repainted (i.e., in years 5, 10, and 15), the cost will increase by 20% over the previous time. As an alternative, the exterior can be covered with a vintage-appearing vinyl-coated siding now and again 10 years from now at a cost 25% greater than the present cost of the siding. At a MARR of 10% per year, what is the maximum amount that Brooke should spend now on the siding alternative so that the two alternatives will just break even? Solve using factors. The maximum amount that Brooke should spend now on the siding alternative is $ . Note:- Do not provide handwritten solution. Maintain accuracy and quality in…arrow_forward
- Richard Rambo presently owns the Marine Tower office building, which is 20 years old, and is considering renovating it. He purchased the property two years ago for $830,400 and financed it with a 20-year, 75 percent loan at 4.50 percent interest (monthly payments). Of the $830,400, the appraiser indicated that the land was worth $200,000 and the building $630,400. Rambo has been using straight-line depreciation over 39 years (1/39 per year for simplicity). At the present time Marine Tower is producing $53,900 in NOI, and the NOI and property value are expected to increase 2 percent per year. The current market value of the property is $888,000. Rambo estimates that if the Marine Tower office building is renovated at a cost of $200,000, NOI will be about 20 percent higher next year ($64,680 vs. $53,900) due to higher rents and lower expenses. He also expects that with the renovation the NO/ will increase 3 percent per year instead of 2 percent. Furthermore, Rambo believes that after…arrow_forwardAfter reading an estate planning article, Vaughn has decided to take action to reduce his gross estate by making annual gifts to his four children, eight grandchildren, and four great-grandchildren. Vaughn has discussed the gifting strategy with his wife, Rebecca and she has agreed to split each gift. If Vaughn gifts the maximum amount each year without incurring gift taxes, how much can he gift this year? Must a gift tax return be filed? Celeste and Raymond have bene married for 29 years. Last year, Raymond sold his business and his net worth now exceeds $30 million. Celeste and Raymond have twin daughter, Kelly and Shelly. Celeste and Raymond, neither of whom have given any gifts in the past, would like to give their daughters the maximum amount of cash possible without incurring any gift tax liability. How much can Celeste and Raymond give to Kelly and Shelly this year?arrow_forwardSam decides to buya cattle ranch and leave the big city rat race.He locates an attractive 500-acre spread in Montana for $1000 per acre that includes a house, a barn, and other improvements. Sam’s studies indicate that he can run 200 cow–calf pairs and be able to market 180 500-pound calves per year. Sam, being rather thorough in his investigation, determines that he will need to purchase an additional $95,000 worth of machinery. He expects that supplemental feeds, medications, and veterinary bills will be about $50 per cow per year. Property taxes are $4000 per year, and machinery upkeep and repairs are expected to run $3000 per year. If interest is 10% a net salary of $10,000 per year, how much will he have to get for each 500-pound calf?arrow_forward