CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL

1. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows:

Mortgage interest	$9,000
Real estate taxes	3,000
Utilities	2,000
Maintenance	1,000
Insurance	500
Depreciation (rental part)	4,000

Using the IRS approach, totalexpenses that Robyn can deduct on her tax return associated with the beach house are:

a. $0.

b. $6,000.

c. $8,000.

d. $12,000.

e. None of the above.

2. If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?

a. All rental income is included in gross income.

b. All rental related expenses that are deductible are classified as deductions fromAGI.

c. Expenses must be allocated between rental and personal use.

d. Only a. and c. are correct.

e. a., b., and c. are correct.

3. Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows:

Gross rental income		$4,000
Less: Mortgage interest and property taxes	$3,500
Other allocated expenses	2,000	(5,500)
Net rental loss		($1,500)

What is the correct treatment of the rental income and expenses on Bob and April’s joint income tax return for the current year assuming the IRS approach is used if applicable?

a. A $1,500 loss should be reported.

b. Only the mortgage interest and property taxes should be deducted.

c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use.

d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted.

e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return.

4. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct?

a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part.

b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part.

c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part.

d. Only b. and c. are correct.

e. a., b., and c. are correct.

5. Melba incurred the following expenses for her dependent daughter during the current year:

Payment of principal on daughter’s automobile loan	$3,600
Payment of interest on above loan	2,900
Payment of daughter’s property taxes	1,800
Payment of principal on daughter’s personal residence loan	2,800
Payment of interest on daughter’s personal residence loan	7,000
How much may Melba deduct in computing her itemized deductions?
a. $0.
b. $8,800.
c. $11,700.
d. $18,100.
e. None of the above.

taxpayer’s obligation.

6. Velma and Bud divorced. Velma’s attorney fee of $5,000 is allocated as follows:

General representation in obtaining the divorce	$1,500
Services in obtaining custody of the child	900
Services in settlement of martial property	600
Determining the tax consequences of: Dependency deduction for child	700
Property settlement	1,300

Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:

a. $0.

b. $700.

c. $2,000.

d. $5,000.

e. None of the above.

7. Which of the following must be capitalized by a business?

a. Replacement of a windshield of a business truck which was broken in an accident.

b. Repair of a roof of a building used in business.

c. Amount paid for a covenant notto compete.

d. Only b. and c. must be capitalized.

e. a., b., and c. can be expensed rather than capitalized.

8. On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.

Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014?

a. $10,667.

b. $16,000.

c. $20,000.

d. $32,667.

e. None of the above.

9. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?

a. Disallowed loss to James of $2,000; gain to Lance of $1,000.

b. Disallowed loss to Lance of $2,000; gain to James of $3,000.

c. Deductible loss to Lance of $2,000; gain to James of $3,000.

d. Disallowed loss to Lance of $2,000; gain to James of $1,000.

e. None of the above.

.

10.Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?

a. Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis).

b. Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).

c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.

d. Only a. and b. are correct.

e. a., b., and c. are correct.

11.Which of the following is nota related party for constructive ownership purposes under § 267?

a. The taxpayer’s aunt.

b. The taxpayer’s brother.

c. The taxpayer’s grandmother.

d. A corporation owned more than 50% by the taxpayer.

e. None of the above.