Finance and Economics
Fred is an investor in vacant land. When he thinks he has identified property that would be a good investment, he
approaches the landowner, pays the landowner for a "right of first refusal" to purchase the land, records
this right in the property records, and then waits to see if the land increases in value. The right of first refusal
is valid for four years. Fourteen months ago, Fred paid a landowner $9,000 for a right of first refusal. The land
was selected as the site of a new shopping center, and the landowner was offered $1 million for the land. In its
title search on the land, the buyer discoverd Fred’s right of first refusal and involved him in the purchase
negotiations. Ultimately, the landowner paid Fred $220,000 to give up his right of first refusal; the landowner then
sold the land to the buyer for $4,220,000. Fred has a marginal tax rate of 35%.
a. What difference does it make whether Fred treats the right of first refusal as an option to purchase the land?
b. What difference does it make whether Fred is a "dealer" in land?
33. LO.3 Tricia owns numerous office buildings. A major tenant of one of the buildings wanted to cancel its lease
because it was moving to another city. After lengthy negotiations, the tenant paid Tricia $5000,000 to cancel its
obligations under the lease. If the tenant had fulfilled the lease terms, Tricia would have received rent of $1.8
million. What factors should Tricia consider to determine the amount and character of her income from these
circumstances?
41. LO.2, 4, 5 Bridgette is known as the "doll lady." She started collecting dolls as a child, always
received one or more dolls as gifts on her birthday, never sold any dolls, and eventually owned 600 dolls. She is
retiring and moving to a small apartment and has decided to sell her collection. She lists the dolls on an Internet
auction site and, to her great surprise, receives an offer from another doll collector of $45,000 for the entire
collection. Bridgette sells the entire collection, except for five dolls she purchased during the last year. She had
owned all of the dolls sold for more than a year. What tax factors should Bridgette consider in deciding how to
report the sale?
43. LO.5 Phil has the following long-term capital gains and losses for 2012: $32,000 28% gain, $11,000 28% loss,
$18,000 25% gain, and $34,000 0%/15% gain. He also has a $23,000 short-term loss and a $5,000 short-term gain. What
is Phil’s AGI from these transactions? If he has a net long-term gain. What is its makeup in terms of the
alternative tax rates?
chapter 14
4. LO.1 Ivan invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the
bonds earn interest of $8,000 each year. After holding the land and bonds for five years, Ivan and Grace sell them.
There is a $40,000 realized gain on the sale of the land and no realized gain or loss on the sale of the bonds. Are
the tax consequences to Ivan and Grace the same for each of the five years? Explain.
10. LO.1 Marge owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market
value of $250,000. The property is subject to a mortgage of $400,000. BecauseMarge is in arrears on the mortgage
payments, the creditor is willing to accept the property in return for canceling the amount of the mortgage.
a. How can the adjusted basis of the property be less than the amount of the mortgage?
b. If the creditor’s offer is accepted, what are the effects on the amount realized, the adjusted basis, and the
realized gain or loss for Marge?
c. Does it matter in (b) if the mortgage is recourse or nonrecourse?
15. LO.2 Sandra is considering selling tow personal use assets that she owns. One has appreciated in value by
$14,000, and the other has declined in value by $18,000. Sandra believes that she should sell both assets in the
same tax year so that the loss of $18,000 can offset the gain of $14,000.
a. Advise Sandra regarding the tax consequences of her plan.
b. Could Sandra achieve better tax results by selling the assets in different tax years? Explain.
16. LO.2 Ron sold his sailboat for a $5,000 loss in the current year because he was diagnosed with skin cancer. His
spouse wants him to sell his Harley-Davidson motorcycle because her brother broke his leg while riding his
motorcycle. Because Ron no longer has anyone to ride with, he is seriously considering accepting his wife’s advice.
Because the motorcycle is a classic, Ron has received two offers. Each offer would result in a $5,000 gain. Joe
would like to purchase the motorcycle before Christmas, and Jeff would like to purchase it after New Year’s.
Identify the relevant tax issues Ron faces in making his decision.