During the 1984 Olympics Frank and Irma rented their home in Hollywood, California and enjoyed a three-week
Question:
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:
- Compute Frank & Irma’s modified adjusted gross income.
- Under the Passive Activity Loss rules, how much of this loss can Frank & Irma claim on their Federal Income Tax return?
- What is their adjusted gross income after considering the Passive Activity Loss rules?
- What is the difference between active participation in a rental property and material participation in a rental property?
- 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))
