This is Property taxation

Your client, Steven Kupka, a calendar year/cash method taxpayer, was involved

in a number of transactions during the 2022 calendar year. For whatever reason,

Mr. Kupka failed to seek your advice prior to engaging in any of these

transactions. Thus, it is your job to analyze each of the following completed

transactions.

Beware: you do not have sufficient information to completely analyze

each transaction. It is incumbent upon you to ask your client questions in

the discussion area set up for the final!!

1. RENTAL PROPERTY

In 2015, Mr. Kupka bought a home that he used as his personal residence by

paying $200,000 cash and borrowing $600,000 secured by a mortgage on the

property. Later in 2015, Mr. Kupka took out a home equity loan in the amount of

$75,000, securing the loan through a second mortgage on the property. On

December 1, 2019, Mr. Kupka moved out and rented the property to Mr. Ty for

$4,500 per month on a four-year lease. Mr. Ty also paid Mr. Kupka $13,500 as a

security deposit. In addition to the right to occupancy, the lease also gave Mr. Ty

the right to purchase the property at any time during the lease term for

$1,950,000. The agreement provides that both the security deposit and 10% of

the monthly rent paid to the date of exercise will be credited against the purchase

price. On November 1, 2022, Mr. Kupka entered into an exchange contract with

Ms. Smart, under which Mr. Kupka would transfer the residence to Ms. Smart in

exchange for a fourplex. The agreed-upon prices for the properties were

$1,750,000 for Mr. Kupkas residence and $2,050,000 for Ms. Smarts rental

property. In addition, the contract called for Ms. Smart to assume the existing

mortgage on Mr. Kupkas property. In return, Mr. Kupka agreed to the following:

(i) to assume the existing first mortgage on Ms. Smarts property (which

had a balance of $632,475 at the time of closing),

(ii) to pay Ms. Smart $200,000 in cash, and

(iii) to transfer to Ms. Smart a painting. (The appraised value of the

painting was between $37,000 and $42,000.)

In addition, Ms. Smart agreed to take the property subject to the outstanding

lease and option held by Mr. Ty. The deal closed on these terms on December

31, 2022.

Analyze each individual transaction. As part of your analysis, you should perform

each of the following tasks for each transaction:

a) Where appropriate, (hint: the lease to Mr. Ty and the warehouse purchase),

determine the true classification of the transaction (i.e., its economic

substance) for income tax purposes.

b) Calculate the amount of realized gain or loss respecting each transaction.

(That necessarily means you must determine Mr. Kupkas amount realized for

each disposition and his adjusted basis in the asset being disposed of. Be

sure to calculate depreciation as necessary, and to adjust your basis

accordingly.)

c) Determine the amount of recognized gain or loss on each transaction.

(Remember the golden rule: generally realized gain or loss must be

recognized unless there is a rule of nonrecognition that applies. The only

transaction where nonrecognition comes into play is the exchange between

Mr. Kupka and Ms. Smart. (Dont assume that Mr. Kupka qualifies for

nonrecognition treatment. You must explain why he does or doesnt!)

d) Determine the amount of ordinary income generated by the operation of

Mimis Furniture & Appliance and the amount of Mr. Kupkas rental income

from the warehouse and the lease with Mr. Ty for 2022.

e) Determine the character of recognized gain or loss from each transaction (as

(i) ordinary income, (ii) 1231, (iii) STCG/L, (iv) LTCG/L).

f) With respect to any assets Mr. Kupka has acquired in these transactions,

determine Mr. Kupkas basis and holding period in the acquired property.