Posted: September 13th, 2017

Individual Tax Research Paper

Paper, Order, or Assignment Requirements

RESEARCH ASSIGNMENT

Anticipating retirement in five years and desiring to spend increasing amounts of time in the sunshine state Mr. and Mrs. Lee signed a contract to buy a condominium for $500,000 in Miami Beach Florida. They are in the 33% marginal tax bracket and live in Maryland where they pay 7% state and county income taxes. They have ten days to review the contract before it becomes binding. They are required to put a 20% deposit and the Seller will finance the balance for ten years interest only at 5% annually.
The salesman has told the Lees they can rent the condominium back to the Developer for two years for $4,000 a month and still use the Unit for up to 30 days a year. The Salesman also estimated property taxes for the year at $10,000, maintenance such as condo fees at $6,000 per year, insurance at $200 a month and utilities at $300 a month. The Salesman told the Lees to expect property appreciation at 6% a year and tax savings every year while enjoying a vacation home.
Residential property is depreciated on a straight line basis over 27.5 years and non-residential property is depreciated over 31.5 years.
• Can this condominium provide the Lees with desirable personal use characteristics and provide attractive tax write offs?
• Will passive activity rules apply and will ownership of the condo constitute an activity engaged in for profit?
• What are the prospective deductions and tax savings assuming ownership and operation of the condo is an activity entered into for profit?
• What are the prospective deductions and tax savings assuming ownership and operation of the condo if we assume that ownership and operation of the condo is not an activity entered into for profit so that the allowance of the tax deductions is limited to the income from the activity?
• Lastly should the Lees cancel the contract or go forward with the purchase and why?
• In your Research Memorandum please consider IRC§§162, 163(a), 168, 183, 212, 280A, 469(j), 469(i) and Treasury Regulations §1.183-1. Does the legislative history for IRC §183 provide any insight as to the tax implications involved in personal use, on the one hand, and business use, on the other of a resort condominium?

In addition to your Research Memorandum please provide your recommendations in a short client letter to Mr. and Mrs. Lee to which you will attach your Research Memorandum. Please use BNA and cite any appropriate IRS Code sections in your Memorandum. Please do not exceed ten pages for the Memorandum and client letter. I am most interest in your thought process.