Problem 5-56 (LO. 4, 5) Fran, who is in the 35% tax bracket, recently collected $100,000...

Problem 5-56 (LO. 4, 5)

Fran, who is in the 35% tax bracket, recently collected $100,000 on a life insurance policy she carried on her father. She currently owes $120,000 on her personal residence and $120,000 on business property. National Bank holds the mortgage on both pieces of property and has agreed to accept $100,000 in complete satisfaction of either mortgage. The interest rate on the mortgages is 8%, and both mortgages are payable over 10 years. What would be the tax consequences of each of the following alternatives assuming that Fran currently deducts the mortgage interest on her tax return?

Indicate whether the following statements are "True" or "False" regarding the tax consequences for Fran of each scenario.

a. Tax consequences of retiring the mortgage on the residence:

If Fran retires the debt on the residence, she must recognize $20,000 as income from discharge of indebtedness.
Fran qualifies for the exclusion for cancellation of debt on a personal residence.

b. Tax consequences of retiring the mortgage on the business property:

Fran must recognize $20,000 income due to forgiveness of the business debt.
Fran can choose to reduce her basis in the business assets instead of recognizing $20,000 income, assuming the liability is qualified business indebtedness.

c. If minimizing current taxes is Fran's main objective, which alternative should she select?

Retire the mortgage on the residence
Retire the mortgage on the business property

Solutions

Expert Solution

a. Tax consequences of retiring the mortgage on the residence:

If Fran retires the debt on the residence, she must recognize $20,000 as income from discharge of indebtedness. True

Fran qualifies for the exclusion for cancellation of debt on a personal residence. False

b. Tax consequences of retiring the mortgage on the business property:

Fran must recognize $20,000 income due to forgiveness of the business debt. False

Fran can choose to reduce her basis in the business assets instead of recognizing $20,000 income, assuming the liability is qualified business indebtedness. True

c .If minimizing current taxes is Fran's main objective, which alternative should she select?

Retire the mortgage on the residence False
Retire the mortgage on the business property True

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Casey is in the 12% marginal tax bracket, and Jean is in the 35% marginal tax...

Casey is in the 12% marginal tax bracket, and Jean is in the 35% marginal tax bracket. Their employer is experiencing financial difficulties and cannot continue to pay for the company's health insurance plan. The annual premiums are approximately $8,000 per employee. The employer has proposed to either (1) require the employee to pay the premiums or (2) reduce each employee's pay by $10,000 per year with the employer paying the premium. Which option is less objectionable to Casey, and...

Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Each...

Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Each of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately $450,000. The entity will distribute enough cash, as a dividends distribution, each year to Mabel and Alan to cover their Federal income taxes associated with the franchise (excluding any tax related to their salaries). If an...

If Isabella Rodriguez is single and in the 35 percent tax bracket, calculate the tax associated...

If Isabella Rodriguez is single and in the 35 percent tax bracket, calculate the tax associated with each of the following transactions. (Hint: Use the IRS regulations for capital gains in effect in 2018.) Treat each of the following cases as independent of the others. Tax savings should be preceded by a "-" sign. Round the answers to the nearest cent. She sold stock for $3,930 that she purchased for $3,000 4 months earlier. $ _____ She sold bonds for...

Problem 5-35 (LO 5-1, 5-2, 5-3, 5-4, 5-5, 5-6, 5-7) The individual financial statements for Gibson...

Problem 5-35 (LO 5-1, 5-2, 5-3, 5-4, 5-5, 5-6, 5-7) The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $960,000. At the acquisition date, the fair value of the noncontrolling interest was $640,000 and Keller’s book value was $1,280,000. Keller had developed internally a customer list that was not recorded on its books...

John is in the 35% tax rate bracket and has sold the following stocks in 2017:...

John is in the 35% tax rate bracket and has sold the following stocks in 2017: Date purchased Basis Date Sold Amount Realized Stock A 1/23/2013 5,250 7/22/2017 3,500 Stock B 4/10/2017 14,000 9/13/2017 16,500 Stock C 8/23/2014 10,750 10/12/2017 15,300 Stock D 5/19/2014 4,230 10/12/2017 10,400 Stock E 8/20/2017 8,300 11/14/2017 3,500 Please answer the following questions based on the above information: a) What is George’s net short-term capital gain or loss from these transactions? b) What is George’s...

Problem 3-35 (LO. 3, 4) Determine whether the individuals will qualify as the taxpayer's dependent in...

Problem 3-35 (LO. 3, 4) Determine whether the individuals will qualify as the taxpayer's dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or "not applicable" (if the individual does not qualify as a dependent). a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support....

Who will bear the burden of tax if the tax is collected from the supplies, if...

Who will bear the burden of tax if the tax is collected from the supplies, if A. Supply is perfectly elastic? B. Supply is perfectly inelastic? C. Demand is perfectly elastic? D. Demand is perfectly inelastic?

What effect does increasing credit risk have on securities? If I'm at the 35% tax bracket...

What effect does increasing credit risk have on securities? If I'm at the 35% tax bracket and a muni is paying 4%, what yield must I get on a taxable to compete? What factors influence the shape of the yield curve? Can I use those factors to aid my investing?

Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4) Redwood Company sells craft kits and supplies to...

Exercise 5-35 ABC; Selling Costs (LO 5-2, 5-4) Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of the items are manufactured by Redwood, while others are purchased for resale. For the products it manufactures, the company currently bases its selling prices on a product-costing system that accounts for direct material, direct labor, and the associated overhead costs. In addition to these product costs, Redwood incurs substantial selling costs, and Roger Jackson, controller, has...

One of your friends, who is in 20% marginal tax bracket, is planning to buy a...

One of your friends, who is in 20% marginal tax bracket, is planning to buy a condo selling for $140,000. Your friend’s plan is to make a down payment of 20% and finance the balance from a bank at a fixed rate of 4.99% over 30 years with monthly payments. He needs your help in figuring out his first year tax savings if he decides to buy this home. A. $3,219 B. $1,575 C. $5,551 D. $1,441

Subjects