Question No 4. (16.667% - 20 minutes)

Applying the same facts as in problem 3(a) hereinabove, assume that after Betty acquired the lake property, subject to the mortgage, it increased greatly in value to $800,000 and Betty mortgaged the Rose Lake property for an additional $200,000. Betty was not required to sign a promissory note, the debt being secured by the 2nd mortgage on the lake property. The cash proceeds from the loan were used to purchase $200,000 of Apple stock. The increase in property value was short lived, and Betty sold the lake property on December 3, 2019 for $15,000 cash, with the purchaser taking the lake property subject to the two mortgages, both of which were still at their original amounts of $400,000 and $200,000. The fair market value of the property on the date of the sale was unknown, but probably about $350,000. Bettys intention, when she acquired the lake property, was to develop the property into residential lots and sell the individual lots to buyers. Her intention never changed.

(a) What is the transaction as to Betty. Discuss and explain. (Hint: a transaction is an exchange between two or more persons).

(b) What was Bettys tax basis in the lake property at the time of the transfer from Rich? Discuss and explain.

(c) Discuss the income tax consequences, if any, to Betty from her sale of the lake property. Explain and support your answer, providing necessary supporting calculations. Show your computations - required. Computations only will not be sufficient.

Gain (Loss): $_________________ Character of Gain or Loss _______________ Basis $_____________

Space for computations

Space for written answer