Tax Research – Disposition of Property
Your clients are Mr. and Mrs. Nittany, cash basis taxpayers who file a joint Form 1040. Six years ago, Mr. Nittany sold investment landwith a basis of $562,250 to Pitt LLC for $865,000. The LLC gave Mr. Nittany a note for the entire sale price. The land was collateralfor the note, and Mr. Nittany used the installment sale method to recognize his taxable long-term capital gain on sale. Early thisyear, Pitt LLC defaulted on the note and Mr. Nittany repossessed the land. On the date he regained title, the principal of his Pitt LLCnote was $644,000. Mr. Nittany is hoping to find another buyer for the land by the end of the year.In March, Mrs. Nittany sold a residential rent property that she had owned and managed for several years. The property generated netlosses for the last two years, and Mrs. Nittany has a $28,750 suspended ordinary passive activity loss with respect to the rentproperty that carried into this year. Her current year operating loss through date of sale is $4,293. The Nittanys own no interests inpassive activities other than this property, and they are not eligible for any Section 469(i) offset because their AGI is well inexcess of $150,000.Mrs. Nittany’s original cost of the realty (land and building) was $338,200, and accumulated straight-line depreciation through date ofsale was $41,920 making her adjusted basis $296,280. The sale included the furnishing (appliances, furniture, rugs, etc.). Mrs.Nittany’s original cost of the furnishings was $21,400, and accumulated MACRS depreciation through date of sale was $15,000, making thefurniture’s adjusted basis $6,400. She sold the property to an unrelated purchaser for $400,000 lump-sum contract price ($385,000allocated to the realty and $15,000 allocated to the furnishings) and received an $80,000 cash down payment and the purchaser’sinterest bearing note for $320,000. Mrs. Nittany will not receive her first principal payment on the note until 2017.Ten years ago, the Nittanys purchased a small farm in Centre County for $618,000. The property consisted of a 75-year-old, four-bedroomfarmhouse and two barns located on 113 acres of woods and pasture land. The Nittanys live in the farmhouse and use the barns only forpersonal storage. They originally planned to buy a herd of dairy cattle, sheep, and perhaps some chickens, and try their hand atfarming, but they never purchased any livestock or actually engaged in any farming activity. Six years ago, the Nittanys paid $176,000for a 46-acre tract of pasture land adjacent to their property. They knew that property values in Centre County were increasingdramatically so that the land was an excellent long-term investment. They also wanted to own the land to prevent any type ofdevelopment that would spoil their mountain views, invade their privacy, and disrupt the peace and quiet of their rural home.Although the Nittanys love their farm, they are growing older and want to move closer to their children and grandchildren. A developerhas approached them about buying the entire 159 acres. He plans to demolish the farmhouse and barns, subdivide the land into one-acrelots, and sell the lots to various local builders. He has offered the Nittanys $1.4 million cash.RequiredIdentify the tax issues suggested by these facts and formulate your research questions accordingly. Please show the IRC source,regulations and any court cases for each paragraph.
