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2. Jerry received two acres of land valued at $10,000 as a gift. The donor's adjusted basis was $12,000.

Jerry subsequently sold the land for $20,000. For purposes of computing his gain, what is Jerry's basis in the land? Select your answer: A. $12,000 B. $10,000 C. $ 8,000 D. $ 2,000 The correct answer is "A. $12,000". ANALYSIS: If the FMV of property received as a gift is less than the donor's adjusted basis, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for loss on its sale or other disposition is its fair market value at the time you received the gift plus or minus any required adjustment to basis during the period you held the property. In this transaction, the property sold for $20,000 and resulted in a gain. Therefore, his basis for gain would be the donor's adjusted basis of $12,000. 3. A married couple, who are both self employed, and work out of their home, purchased a new home in July 2008 for $420,000. In September 2008, they converted two bedrooms into office space where they meet clients in their home. In April 2010, they sold their home, on which they had taken $40,000 depreciation. Their home sold for $600,000. What amount of the gain is includable in their income on their joint return? Select your answer: A. $ -0B. $ 40,000 C. $180,000 D. $220,000 The correct answer is "D. $220,000". ANALYSIS: You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

1. You meet the ownership test.

2. You meet the use test. 3. During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have: 1. Owned the home for at least 2 years (the ownership test), and 2. Lived in the home as your main home for at least 2 years (the use test). If you don't meet the above tests, you may be able to exclude a portion of the gain if you meet the reduced exclusion test. This test may apply if the primary reason for the home sale was a change in place of employment, health, or unforeseen circumstances. This couple bought the home in July of 2008 and sold the home in April of 2010. They owned and used the home for 22 months which is less than the 24 months required to exclude the gain under the ownership and use test. They also did not meet the reduced exclusion tests. Therefore, the total gain is includable in their taxable income. Computed as follows:

1 2 3 4

Selling price of home Selling expenses Subtract line 2 from line 3 Adjusted basis of home Cost Less: Depreciation

$600,000 -0$600,000 $420,000 ($40,000)

($380,000) $220,000

5 Taxable gain

4. Jean is a U.S. citizen living and working in France for all of 2010. She received wages of $150,000, dividends of $10,000 and alimony of $20,000 in 2010. She decides to use the foreign earned income exclusion available to her and file Form 2555. What is the amount of Jean's foreign earned income before any limitations are applied? Select your answer: A. $ -0B. $ 80,000 C. $150,000 D. $180,000 The correct answer is "C. $150,000". ANALYSIS: Foreign earned income consists of salaries and wages, commissions, bonuses, professional fees, tips, and business profits. Foreign unearned income consists of dividends, interest, capital gains, alimony, pensions, social security benefits, and gambling winnings. Dividends and alimony are not considered to be earned income. Therefore, Jean's foreign earned income, before the maximum 2010 foreign income exclusion of $91,500, is her wages of $150,000.

5. If you and your spouse each have separate businesses, you may each give a $25 business gift to the same person. Select your answer: True False The correct answer is "False". ANALYSIS: You can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer. It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient.

6. Michael wants to convert his personal residence to a rental property. He paid $300,000 for the property and the allocation of value for tax assessment has always been 2/3 building and 1/3 land. Over the years he incurred $50,000 in permanent improvements to the house. He claimed a casualty loss deduction of $5,000 in one year. On the date of conversion the fair market value of the property was $600,000. What is the basis for depreciation of this rental? A. $600,000 B. $345,000 C. $245,000 D. $400,000 The correct answer is "C. $245,000". ANALYSIS: When you hold property for personal use and change it to business use or use it to produce rent, you must figure its basis for depreciation. Your basis for depreciation is the lesser of the following amounts: y y The FMV of the property on the date of the change. Your adjusted basis on the date of the change.

To compute adjusted basis you must add or subtract certain items to or from the original basis. The original basis in this question is the cost. A permanent improvement increases basis and a casualty loss deduction decreases basis. To correctly answer this question you have to assume that the casualty loss only applied to the building and did not affect the basis of the land, and the FMV of the property on the conversion date was the total value, which includes the land. Computed as follows:

Cost basis Cost Plus: Permanent improvements Less: Casualty loss deducted Total adjusted basis

Total 100% $300,000 $50,000 ($5,000) $345,000

Land 1/3 $100,000 -0$100,000

Bldg. 2/3 $200,000 $50,000 ($5,000) $245,000

FMV on conversion date FMV

Total $600,000

Land $200,000

Bldg. $400,000

Depreciable basis is $245,000 which is the lesser of the adjusted basis of $245,000 or FMV on the conversion date of $400,000.