Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

During the 1984 Olympics Frank and Irma rented their home in Hollywood, California and enjoyed a three-week vacation at their condo in Malibu, California. By

During the 1984 Olympics Frank and Irma rented their home in Hollywood, California and enjoyed a three-week vacation at their condo in Malibu, California. By 2000, they decided to retire to the Palm Springs area. They sold their home and purchase a 4,000 square foot home in La Quinta, California as well as an apartment building in Palm Desert, California for $4,500,000 (i.e., land - $500,000 & Building - $4,000,000). They knew summers would be very warm in La Quinta, so they kept their condo in Malibu for personal use in July & August. They are in the 22% Federal Income Tax bracket. Excel would be an excellent format to answer all three parts of this Project.

Frank and Irma purchased the 20-unit apartment building for $4,500,000 (i.e., $500,000 for the land and $4,000,000 for the building). The income and expenses from the apartment building are as follows:

Income (i.e., 20 units @ $1,500/month) $ 360,000

Expenses:

Depreciation ($4 million @ 2.56%) $ 102,000

Insurance 50,000

Interest Expense ($2 million @ 3%) 60,000

R & M 10,000

Real Estate Taxes 67,500

Utilities 75,000

Manager 12,000

Total <376,500>

Net Income $ <16,500>

The apartment manager collects the rents each month, inspects the property on a regular basis and handles tenant complaints. The apartment manager talks to Frank and Irma regarding the tenant complaints and discusses the potential repairs and maintenance that is required. The manager then arranges for the services contracts with outside vendors. Frank & Irma make the monthly deposits of tenant rent checks at their local bank and pay for all apartment expenditures from an apartment checking account that they control.


Required:

  1. Compute Frank & Irma’s modified adjusted gross income.
  2. Under the Passive Activity Loss rules, how much of this loss can Frank & Irma claim on their Federal Income Tax return?
  3. What is their adjusted gross income after considering the Passive Activity Loss rules?
  4. What is the difference between active participation in a rental property and material participation in a rental property?
  5. What recommendations would you make to Frank & Irma regarding the future management of these apartments? Would they be able to deduct a greater portion of the loss?

Partial List of Resources:

IRC 280A

IRC 469

Reg. 1.469-4

Temp. Reg. 1,469-57

Bolton (694 F 2d 556, 51 AFTR 2d 83-305 (9th 1982))

Step by Step Solution

3.33 Rating (162 Votes )

There are 3 Steps involved in it

Step: 1

Henee for The whole year 30000X12 3601000 FRANK AND IRMA ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Accounting

Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

13th Edition

978-0073379616, 73379611, 978-0697789938

More Books

Students also viewed these Accounting questions

Question

Discuss the role of motivation in financial literacy.

Answered: 1 week ago

Question

Why are there two stages of allocation in activity-based costing?

Answered: 1 week ago