Tax Facts

Mr. and Mrs. A report all of their income and deductions, including all of their business income and deductions, on their joint personal return. Mr. and Mrs. A use the cash method of accounting with respect to all of their activities. Mr. and Mrs. A use straight-line depreciation for buildings, computed monthly. The depreciable life of commercial real estate is 39.0 years (468 months) and the depreciable life of residential rental property is 27.5 years (330 months). Mr. and Mrs. A use MACRS depreciation for other depreciable tangible assets. Assume that all of their other depreciable tangible assets constitute 5-year property and are subject to the following MACRS depreciation schedule: Year Percent of Basis Deducted 1 20% 2 32% 3 19% 4 12% 5 12% 6 5% Please assume bonus depreciation under section 168(k) at 50% with respect to all property placed in service before January 1, 2018, and 100% with respect to all property placed in service after December 31, 2017. Please assume that Mr. and Mrs. A received and paid all rent on leases and interest on loans outstanding at the end of 2018 before the end of 2018 and will report or deduct all such rent and interest on their 2018 return. Due to complexities in computation, please ignore rent and interest becoming due in 2019 on leases and loans outstanding on January 1, 2019, and depreciation on assets held on January 1, 2019. Marginal Federal income tax rate for ordinary income: 37.0% Marginal Federal long-term capital gains rate: 20.0%, except for unrecaptured depreciation on real estate (taxed at 25.0%) and gain from collectibles (taxed at 28.0%). Applicable Adjusted Federal Rate: Short-Term: 2.75% per annum Mid-Term: 3.00% per annum Long-Term: 3.25% per annum. Your Task Please estimate Mr. and Mrs. As tax bill for 2019. In making your estimate, please assume that Mr. and Mrs. A will make use of all available opportunities to defer the tax on their transactions into years after 2019. In addition, please compute the amounts of income and deduction that Mr. and Mrs. A will have to report in years after 2019 with respect to the transactions closed in 2019.

Statement of Facts It is November 20, 2019, and your clients, Mr. and Mrs. A, have asked you to project their Federal income tax bill for the year 2019. In order to permit you to estimate their tax, they provide you with the following information. Please assume that all projected transactions will occur as planned no later than December 31, 2019. For some 20 years, Mr. A has owned and operated a small real estate development firm. Mr. and Mrs. A give you the following information on their relevant transactions in 2019 to date.

Lot A

On July 1, 2005, Mr. and Mrs. A paid $25,000 for an option to purchase Lot A. They exercised the option on January 1, 2006, at which time they paid the exercise price of $225,000 by delivering to the seller their nonrecourse note in the principal amount of $225,000, bearing interest at 5.0% per annum payable monthly in arrears and requiring equal payments of principal in the amount of $1,000 payable monthly in arrears. The term of the purchase money note was 225 months. On October 1, 2019, Mr. and Mrs. A entered into a ground lease agreement with Developer A under which they leased Lot A to Developer A for a term of 99 years. The rent due under the lease was $7,500/month, payable in advance on the first day of each month during the lease term. Building A Immediately upon exercising their option to purchase Lot A, Mr. and Mrs. A embarked on the construction of a new commercial office building on Lot A (Building A). The construction took one full year. On January 2, 2007, Mr. and Mrs. A received a Certificate of Occupancy for Building A and promptly placed ads in the newspapers offering office suites in Building A for rent to interested businesses under leases for terms of 10 to 20 years. Mr. and Mrs. A spent a total of $1,000,000 on the construction of Building A. They paid this amount using $100,000 of their own cash and $900,000 representing the proceeds of a nonrecourse mortgage from Bank A in the principal amount of $900,000, bearing interest at 5.0% per annum payable monthly in arrears and requiring equal payments of principal in the amount of $2,500 payable monthly in arrears. The term of the mortgage note was 30 years. On October 1, 2019, Mr. and Mrs. A sold Building A to Developer A for $1,200,000 in cash. Developer A, with Bank As permission, took Building A subject to the outstanding mortgage loan from Bank A. Building B On July 1, 2010, Mr. and Mrs. A took over a 99-year lease on a parcel of land (Lot B) and purchased Building B, a multi-unit residential rental property located on

Lot B.

The lease on Lot B called for rental payments of $1,000/month, payable in advance on the first day of each month during the lease term. The purchase price for Building B was $2 million, which Mr. and Mrs. A paid using $300,000 of their own cash and $1,700,000 representing the proceeds of a nonrecourse mortgage from Bank B in the principal amount of $1,700,000, bearing interest at 5.0% per annum payable monthly in arrears and requiring equal payments of principal in the amount of $4,722 payable monthly in arrears. On October 1, 2019, Mr. and Mrs. A assigned the lease on Lot B to a real estate investment trust (REIT B) and sold Building B to REIT B for $250,000 in cash and a nonrecourse note in the principal amount of $1,500,000, bearing interest at 5.0% per annum payable monthly in arrears but requiring no principal payments until the third anniversary of the execution of the note. REIT B, with Bank Bs permission, took Building B subject to the outstanding mortgage loan from Bank B. Building C On July 1, 2013, Mr. and Mrs. A took over a 99-year lease on a parcel of land (Lot C) and purchased Building C, another multi-unit residential rental property located on Lot C.

The lease on Lot C called for rental payments of $3,000/month, payable in advance on the first day of each month during the lease term. The purchase price for Building C was $4.5 million, which Mr. and Mrs. A paid using $450,000 of their own cash and $4,050,000 representing the proceeds of a nonrecourse mortgage from Bank C in the principal amount of $4,050,000, bearing interest at 5.0% per annum payable monthly in arrears, with principal payable in a single lump sum at maturity. On October 1, 2019, Mr. and Mrs. A assigned the lease on Lot C to an individual real estate investor (Investor C) and sold Building C to Investor C in exchange for a nonrecourse note in the principal amount of $5 million, payable in a single lump sum of $5 million on October 1, 2023. Investor C, with Bank Cs permission, took Building C subject to the outstanding mortgage loan from Bank C. Lot D Mr. As father owned an unimproved lot (Lot D) which he had purchased for $30,000 many years ago, intending to build a vacation home.

Lot D was worth $325,000 when Mr. As father died on January 1, 2000, leaving the lot to Mr. As mother under his will. Nine years later, when Lot D was worth $500,000, Mr. As mother gave the lot to Mr. A. Mr. and Mrs. A had no interest in building on Lot A and held on to it solely as an investment. On July 1, 2016, Mr. A borrowed $325,000 from Bank D on a full recourse note in the principal amount of $325,000, bearing interest at 5.0% per annum payable monthly in arrears, with principal payable in a single lump sum on the fifth anniversary of the note. As security for the note, Mr. A granted a mortgage on Lot D to Bank D. On October 1, 2019, Mr. A transferred Lot D to an individual investor (Investor D) in exchange for a downtown lot on which Mr. and Mrs. A could build a new apartment project. The downtown lot was subject to a nonrecourse mortgage in the principal amount of $225,000, bearing interest at 5.0% per annum payable monthly in arrears, with principal payable in a single lump sum on April 1, 2025. The lenders on both lots consented to the transfers. Mr. A estimated that the downtown lot, unencumbered, would sell for $700,000.

Lot E

On January 1, 1999, Mr. and Mrs. A purchased a lot in a residential area for $500,000, paying $75,000 in cash from their own funds and giving their full recourse note for the balance of the purchase price. The note bore interest at 5% payable monthly in arrears, but required no principal payment until January 1, 2029. Mr. and Mrs. A had no particular plans for Lot E but thought it would be a good investment. In early 2019, the pastor of Mr. and Mrs. As church approached them about the possibility of the churchs acquiring Lot E as the site of a new church building. Mr. and Mrs. A agreed to transfer Lot E to the church on the condition that the church assume the mortgage debt and that the mortgage lender release Mr. and Mrs. A from even secondary liability. Mr. and Mrs. A transferred Lot E to the church on October 1, 2019, at which time they were released from any liability on the mortgage note. Mr. A obtained an appraisal from a reputable appraisal firm setting the fair market value of Lot E, unencumbered, at $550,000. Truck F On July 1, 2015, Mr. and Mrs. A purchased a truck for use in their business for $120,000 in cash. The truck was completely destroyed in an accident on a construction site in September 2019, but fortunately no one was seriously injured. Mr. and Mrs. A collected $5,000 in insurance proceeds in respect of the truck on October 1, 2019. Truck G On July 1, 2017, Mr. and Mrs. A purchased another truck for use in their business for $145,000 in cash. This truck was also completely destroyed in the same accident in September 2014, but when Mr. and Mrs. A filed to collect insurance proceeds, they had a long negotiation because they believed the truck had actually increased in value. They collected $160,000 in insurance proceeds in December 2019. Option H On July 1, 2019, Mrs. A purchased an option to purchase shares of Stock H on the New York Stock Exchange. She paid $18,000 in cash for the option. The price of Stock H dropped over the next three months, however, and Mrs. A let the option expired unexercised on October 1, 2019. Stock I On October 1, 2018, Mr. A borrowed $18,000 on a personal recourse loan from his broker and used it, along with $12,000 of his own cash, to purchase 1,000 shares of Corporation I on the New York Stock Exchange. He granted the broker (Broker I) a first security interest in his stock of Corporation I. Corporation I did not do well in 2018 and 2019, and by September 2019 its stock was trading at only $14.00/share. Mr. A was a good customer of Broker I, and he went to his account executive and convinced her that Broker I should, effective October 1, 2019, allow Mr. A to give Broker I all of his stock of Corporation I in satisfaction of all of his remaining obligations in respect of the loan. Stock J On July 1, 2019, Mrs. A invested $65,000 cash in the stock of a start-up company (Company J). In the Fall of 2019, Mrs. A was approached by an established venture capital company that offered to give her its convertible debentures (that is, its notes convertible into its stock) with a stated principal amount of $125,000, bearing interest at 4% per annum, payable on October 1 of each year for a term of 5 years, with principal payable in a single lump sum on October 1, 2024. The debentures were convertible at the option of the holder into 1,000 shares of Class B common stock of the venture capital company. Mrs. A decided that the conversion feature just about balanced out the low interest rate, and that the debentures were probably worth $125,000, their stated principal amount. She accepted the offer and received her debentures on October 1, 2019. Vacation Home On July 1, 2013, Mr. and Mrs. A purchased a vacation home in a new lakefront development hear their home city for a stated purchase price of $1,000,000. They paid $250,000 from their own cash and borrowed the balance of $750,000 from a savings and loan association (the S&L) on a full recourse promissory note. Their note to the S&L required monthly payments of interest at 5% per annum for a period of 15 years and payments of principal of $4,167/month, all in arrears. The developers of the lakefront development never completed the amenities in the community and prices in the development plummeted. On October 1, 2019, after protracted negotiations with the S&L, Mr. and Mrs. A deeded their vacation home to the S&L and the S&L agreed to accept the vacation home in full satisfaction of Mr. and Mrs. As note.

could you just answer LOT A section? I can figure it out if that is answered. thanks.