Question

A Request for a “Tax Solution”

• Let us suppose that you get the  job of your dreams at a prestigious  accounting firm. 

• A partner calls you into his/her office and tells you that a client of the firm, Rose needs your help.

• You are to consider the following factors and review the related transactions and prepare a memo which outlines a plan to minimize her tax liability.

The Facts

• Rose owns a house that she inherited from her grandmother seven months ago.  Her grandmother lived in the house for over 40 years.

• Based on the estate tax return, the fair market value (FMV) of the house at the date of her grandmother’s death was $475,000. 

• According to the grandmother’s attorney, the grandmother’s cost basis in the house was $275,000.

The Potential Real Estate Transaction

• The real estate market for residential housing has recovered in the city in which the house is located.  

• So, based on an appraisal, the house has a fair market value (FMV) of  $600,000.

• Rose is considering two options:

• 1) Give the house to her son Michael and his wife Sandra

• 2) Sell the house

The Potential Car Sale

• Rose also would like to know the tax consequences of selling her car which she purchased for $22,000 four months ago and has used exclusively for personal use. 

• She has been disappointed with its performance. 

• Based on the “Blue Book” value, she anticipates that she can sell it for  $20,000  to $23,000.

Second Potential Real Estate Transaction

• Rose also seeks your advice regarding the tax consequences of these various transactions.

• She owns a building that was involuntarily converted.  

• Hurricane Fred destroyed the property entirely. 

• Rose had to move the business that was located in the building.

The Potential Stock Sale

• Earlier this year, Rose sold 5 shares of Blue Company stock at a realized loss and subsequently repurchased shares of the same stock at a gain.

Rose’s Objectives

• Rose’s objectives are to minimize the recognition of any realized gain and to maximize the recognition of any realized loss.

• Based on the foregoing facts, what would you advise Rose to do with regard to the transactions?