Let's break down the problem step by step, as requested. --- ## **A. Recognized Gain on Sale of Residence** ### **1. Compute Realized Gain:** - **Sale Price:** $475,000 - **Sales Commissions:** $16,000 - **Net Sales Price:** $475,000 - $16,000 = $459,000 - **Adjusted Basis:** $110,000 **Realized gain:** $459,000 (net sales price) - $110,000 (basis) = **$349,000** --- ### **2. Exclusion of Gain (IRC §121):** - Taxpayer is single, lived in the home for at least 2 of last 5 years (lived there 30 years). - Exclusion limit for single filers: **$250,000** **Recognized Gain:** $349,000 (realized gain) - $250,000 (exclusion) = **$99,000** **Final Answer for (a):** **Jim recognizes $99,000 gain on the sale of his residence.** --- ## **B. Forms Preparation** Let’s summarize the entries for Forms 4562, 1040, Schedules D and E. We'll walk through each relevant item. --- ### **1. Rental Property (Schedule E/4562/Depreciation):** #### **Rental Income and Expenses:** - **Gross Rent:** $8,800 #### **Expenses:** - **Interest paid:** $5,900 - **Property taxes:** $1,400 - **Insurance:** $800 - **Maintenance:** $300 #### **Depreciation:** - **Purchase Price:** $100,000 - **Land (20%):** $20,000 - **Building (80%):** $80,000 (depreciable) - **Placed in service:** March 2019; 2023 is year 5 of rental (assuming full year for simplicity). - **Depreciation (Residential, 27.5 years, straight line):** - $80,000 ÷ 27.5 = $2,909 per year #### **Total Expenses:** - Interest: $5,900 - Property taxes: $1,400 - Insurance: $800 - Maintenance: $300 - Depreciation: $2,909 **Total:** $5,900 + $1,400 + $800 + $300 + $2,909 = **$11,309** #### **Net Rental Income (Loss):** - $8,800 (income) - $11,309 (expenses) = **($2,509)** (rental loss) --- ### **2. Capital Gains (Schedule D):** **A. Sale of Land (Exchanged for Car):** - **FMV of Car Received:** $16,500 - **Basis in Land:** $18,000 - **Holding Period:** Long term (purchased in 1993) - **Realized Loss:** $16,500 - $18,000 = **($1,500)** - **Recognized Loss?** No, as this is personal-use property after exchange (IRC §262, §165(c)). Loss on sale of personal-use property is **not deductible**. **B. Sale of Residence:** - Realized gain: $349,000 - Exclusion: $250,000 - **Recognized gain (taxable):** $99,000 (long-term capital gain) --- ### **3. Social Security Benefits (Taxable Portion):** - **Social Security benefits received:** $16,000 - **Other income:** Wages $7,300; Rental loss ($2,509); Capital gain $99,000 Compute "provisional income": - Provisional income = AGI (excluding SS) + tax-exempt interest (none) + ½ SS - AGI before SS: $7,300 (wages) - $2,509 (rental loss) + $99,000 (gain) = $103,791 - Provisional income: $103,791 + $8,000 = $111,791 For single filers, if provisional income > $34,000, up to 85% of SS is taxable. - 85% of $16,000 = $13,600 (SS taxable) --- ### **4. Deductions (1040 Schedule A):** #### **Itemized Deductions:** - **Charitable contributions:** $2,600 - **Personal property tax:** $225 - **Sales tax:** $345 - **Property taxes (residence):** Not listed for residence; only rental property taxes listed (which go on Schedule E) - **Total SALT deduction**: $225 + $345 = $570 (but the sales tax deduction is in lieu of state income tax; in Texas, only sales tax is available) - **Total SALT deduction is limited to $10,000; not relevant here as his total is much less.** **Total Itemized Deductions:** $2,600 (charity) + $570 = **$3,170** **Standard deduction for single filer (2023)** is $13,850 (plus $1,850 for age 65+), so $15,700. He will use the standard deduction. --- ### **5. Summary of Taxable Income:** #### **Income:** - Wages: $7,300 - Rental loss: ($2,509) - Taxable Social Security: $13,600 - Capital gain: $99,000 - **Total Income:** $7,300 - $2,509 + $13,600 + $99,000 = $117,391 #### **Deductions:** - Standard deduction: $15,700 #### **Taxable Income:** - $117,391 - $15,700 = $101,691 --- ## **Form Entries (Overview):** ### **Form 1040:** - Line 1: Wages: $7,300 - Schedule E: Rental loss ($2,509) - Schedule D: Capital gain $99,000 - Social Security: $16,000 received; $13,600 taxable - Standard deduction: $15,700 - Taxable income: $101,691 - Federal income tax withheld: $250 ### **Schedule D:** - Line 1a: Sale of home (long-term gain): proceeds $459,000, cost basis $110,000, gain $349,000, exclusion $250,000, taxable $99,000 - Land: not reported, as loss is not deductible ### **Schedule E:** - Rental income: $8,800 - Expenses: - Mortgage interest: $5,900 - Property tax: $1,400 - Insurance: $800 - Maintenance: $300 - Depreciation: $2,909 - Total expenses: $11,309 - Net loss: ($2,509) ### **Form 4562:** - Section for depreciation of residential rental property: - Date placed in service: March 2019 - Cost/basis: $80,000 - Recovery period: 27.5 years - Method: Straight line - Depreciation: $2,909 --- ## **Summary Table** | Income Item | Amount | |---------------------|-----------| | Wages | $7,300 | | Rental loss | ($2,509) | | Social Security | $13,600 | | Capital gain | $99,000 | | **Total** | $117,391 | | Deductions | Amount | |---------------------|-----------| | Standard deduction | $15,700 | | Taxable Income | $101,691 | --- ## **Final Answers** ### **a. Recognized gain on sale of residence:** **$99,000** ### **b. Forms 4562, 1040, Schedules D and E** **See breakdown above for line-by-line entries.** If you need literal filled-out forms, please specify which one(s) and I can format line-by-line sample entries. The above shows exactly what would be entered for each relevant section.