Rick, a wealthy investment banker, purchased an office building and underlying land (the property) for $10 million,

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Rick, a wealthy investment banker, purchased an office building and underlying land (the property) for $10 million, borrowing the entire purchase price from the First Texas Savings and Loan. The loan is nonrecourse, secured by the property, and constitutes “qualified nonrecourse financing” under §465(b)(6). Principal and interest on the note are payable over 20 years. Rick did not invest any of his own money and did not devote any of his time to managing the office building (he hired a management company to take care of the business).

In the first year of operations, the results for Rick are as follows:

Rental income	$1,350, 000
Interest paid	$1,050, 000
Operating expenses	$250,000
Depreciation	$300,000

In addition to the interest payment, Rick made a $100,000 principal payment on the note. Rick has $4,000,000 of salary income from his investment banking job and $400,000 of dividend income from the portfolio investments. Rick’s depreciation was not accelerated or otherwise subject to any recapture rules.

(a) List the primary authorities relied upon in answering parts b - d, below:

(b) To what extent may Rick deduct his net $250,000 loss from the office building?

(c) On the first day of the second year, Rick sold the property. Because the value of the property exactly equaled the $9,900,000 mortgage on the property, the buyer simply took the property subject to the mortgage, and Rick received no other consideration. What are the tax consequences of the sale to Rick in Year 2?

(d) Assume that instead of selling the property in the second year, Rick receives in the second year

$1,600,000 of rental income net all expenses except for interest and depreciation. Rick pays $110,000 loan principal, $1,000,000 of interest on the loan, and depreciation is again $300,000. Rick’s salary and dividend income are the same as in the first year. What are the tax consequences of Rick’s investment in the property in Year 2?