CHAPTER 6 DEDUCTIONS AND LOSSES: IN GENERAL

1. Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if:

a. She opens a new shop in Vero Beach.

b. She decides notto open a new shop in Vero Beach.

a. .

b. Same response as in a.

2. While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to start the business. What amount of these investigation costs can Angel deduct if:

a. She opens the bookstore on August 1, 2014.

b. She decides not to open the bookstore.

3. Calculate the net income includible in taxable income for the following hobby:

Income	$23,000
Mortgage interest and property taxes allocable to hobby	12,000
Depreciation	4,000
Supplies and fees	7,000

4. During the year, Rita rented her vacation home for twelve days for $2,400 and she used it personally for three months. The following expenses were incurred on the home:

Property taxes	$ 2,200
Mortgage interest	10,800
Utilities and maintenance	1,900
Depreciation	5,000
Insurance	900

Calculate her rental gain or loss and itemized deductions.

5. During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?

6. During the year, Martin rented his vacation home for three months and spent one month there. Gross rental income from the property was $5,000. Martin incurred the following expenses: mortgage interest, $3,000; real estate taxes, $1,500; utilities, $800; maintenance, $500; and depreciation, $4,000. Compute Martin’s allowable deductions for the vacation home.

7. Bridgett’s son, Clyde, is $12,000 in arrears on his residential mortgage payments. Of the $12,000, $7,500 represents interest and $4,500 represents principal.

a. If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct?

b. If Bridgett pays the $7,500 of interest to the lender and loans or gives $4,500 to Clyde, who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde deduct?

c. If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct? How much can Bridgett deduct?

d. Advise Bridgett and Clyde on how the payment should be made.

8. Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees for their respective attorneys with the expenses being itemized as follows:

For	Mattie		Elmer
General costs of the divorce	$3,500		$3,000
Determination of dependency exemptions	1,500		–0–
Property settlement tax consequences	400		1,500
	$5,400		$4,500

Although there is no requirement that he do so, Elmer pays Mattie’s lawyer as a gesture of the positive feelings he still has for her.

a. Determine the deductions for Mattie and for Elmer.

b. Classify the deductions as forAGI and fromAGI.

9. Marvin spends the following amounts on a house he owns:

Repair to roof	$1,100
Carpeting for the living room	1,200
Painting of the exterior	4,000
Replacement of front door	800

a. How much of these expenses can Marvin deduct if the house is his principal residence?

b. How much of these expenses can Marvin deduct if he rents the house to a tenant?

c. Classify any deductible expenses as deductions forAGI or as deductions fromAGI.

10. Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for $160,000. Walter reinvests the proceeds in the stock market. Shirley holds the land for one year and a day and sells it in the marketplace for $169,000.

a. Determine the tax consequences to Walter.

b. Determine the tax consequences to Shirley.