Question

Comprehensive Problem

Jason and Jill are married and have a six-year-old daughter. During the year they sell one acre of land for $80,000. Three years ago, they paid $70,000 for two acres of land. Their other income and deductions are as follows:

Jason’s salary                                                            $ 150,000

Jill’s commissions                                                      82,950

Interest income                                                             8,000

Dividend income (qualifying dividends)                                5,000

Short-term loss on sale of stock in Nippon Inc.                     (15,000)

Deductions for adjusted gross income                              28,000

Calculate Jason and Jill’s taxable income and income tax liability for the current year.

Solution:

Sale of One-Acre of Land:

Selling price                                                                           $ 80,000

Basis in land ($70,000 ¸ 2 acres)                                                -35,000

Long-term gain on sale (held > 12 months)                           $ 45,000

Sale of Nippon, Inc. Stock:

Short-term loss on sale (held £ 12 months)                            (15,000)

Net long-term gain on sales (included in AGI)                           $ 30,000

Salary                                                                                           $ 150,000

Commissions                                                                                           83,350

Interest income                                                                                         8,000

Dividend income                                                                                        5,000

Net long-term capital gain                                                                     30,000

Gross income                                                                                     276,350

Deductions for adjusted gross income                                                      (28,000)

Adjusted gross income                                                                      $ 248,350

Deductions from adjusted gross income:

    Standard deduction                                                                           (24,800)

    Taxable income                                                                           $ 223,550

Wash Sale Problem

Kim owns 10 shares of Tower, Inc. having a basis of $40 per share. On October 5, she buys 10 more shares of Tower, Inc. for $30 a share. On October 31, she sells her original 10 shares for $30 a share.

• What loss does Kim recognize on the sale?
• What is the basis in Kim’s remaining 10 shares of Tower, Inc.?

Realized loss =

Recognized loss =                      

Basis in remaining 10 shares =

                                                                             

Note: If Kim had purchased the additional 10 shares of stock on September 30 or earlier, or if she had purchased the additional shares of stock on December 1 or later, she would have been able to deduct the entire loss.

Answer 1

• Because kim purchased tower stock within 30 days of the day she sold the tower stock at a loss, the wash sale provisions apply to disallow the entire ($100) loss.
• Kim adds the disallowed loss of ($100) to the basis of 10 shares she acquired on October 5. Her basis in these shares is increased from ($300) to ($400).
• If kim had purchased stock on September 30 or earlier or if she had purchased the stock on December 1 or later she would have been able to deduct the entire loss.