Sidd Taxpayer purchased a rental property in San Diego, CA on 1/1/2...

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QuestionQuestion

Sidd Taxpayer purchased a rental property in San Diego, CA on 1/1/2011. He placed the property in service at this same time. He needs your help organizing his numbers for his tax returns this year.

The following details his transactions while operating this rental property.

Purchase Date: 1-1-11
Cost: $ 500,000
Loan $ 400,000
Cash Down payment $ 100,000
Assume 20% of the cost of the property is allocable to Land cost.

Annual Rents Collected $ 36,000
(Includes $2500 of prepaid rents received for 2012 at the end of 2011)
Vacancy Expected 5%
Deposits collected $ 12,000
(Must return to tenant if all conditions are met on departure)

Annual Cash Out
Mortgage
Interest 28,000
Principal 2,600
Insurance 2,500
Repairs - Minor 750
Flood Repairs 4,500
Maintenance 1,200
Property Tax 5,500
Advertising 75
Credit reports 180
Bank fees 120
Accounting Fees 1,200
Appliances for Units 5,000

Other Information
Uncollected rents 1,850
Gift from Grandmother 10,000
Insurance Proceeds from Flood 4,500

Use this data to answer the following questions.
(this question #1 is blank and has no point value)

HINT: Flood insurance merely replaced damaged goods so there is no deduction or income for this amount. The insurance reimbursement cancels out the flood repairs when calculating taxable income.

QUESTION 1
What is Sidd's Taxable Income BEFORE Depreciation?

A. -$3525
B. -$6,125
C. $36,000
D. -$7975

QUESTION 2
Calculate Sidd's available depreciation for the building and any appliances/equipment he owns.
Hint: Look at IRS publication for depreciation. Hint there are two asset lives/types (residential real estate and equipment).
Use the MACRS tables as shown in your readings/lectures.
No bonus depreciation or Sec 179.

A. Building Year 1: $14,545 ; Equipment Year 1: $1000
B. Building Year 1: $13,940; Equipment Year 1: $500
C. Building Year 1: $13,940; Equipment Year 1: $1000
D. Building Year 1: $17,425; Equipment Year 1: $1000

QUESTION 3
How would the answer in Question 9 change if this were a commercial rental property instead (non-residential)?
(Ignore the equipment depreciation for this question - just provide the new depreciation for the building only)

A. Total Depreciation now = $10,844
B. Total Depreciation now = $9,844
C. Total Depreciation now = $10,256
D. Total Depreciation now = $11256

QUESTION 4
If this building is sold on 1/1/2012 for $350,000 what is the Gain or Loss recognized for tax purposes?

Hint: GAIN= Sales Proceeds less Cost of Building, Land & Equipment Plus depreciation (see question 8).

A. -$155,000
B. -$135,060
C. -$140,060
D. $350,000

QUESTION 5
What is the Net Cash Flow to the owner on this property from the Sale?

Hints:
Assume balance of loan at time of sale was: $368,800
No commissions, broker fees or Taxes paid to keep this simple.
NET CASH FLOW = Cash in less Cash Out
Cash in = sale proceeds
cash out = repayment of debt

A. $350,000
B. $368,800
C. -$68,000
D. -$18,800

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