1. At a cost of $10,000, Sleepy purchased a car three years ago for personal use
ID: 2484520 • Letter: 1
Question
1. At a cost of $10,000, Sleepy purchased a car three years ago for personal use. In the current year, she dozed off one night while driving. Before the accident, the car was work $8,000 but after only $1,000. At the time of the accident Sleepy was taking a vase, a decorative ornament in her home, to a dealer to have it appraised. it had been purchased two years earlier for $10,000, and it was totally destroyed in the accident. Sleepy recovered $1,000 in insurance for the care and $20,000 for the vase. Disregarding the above transactions Sleepy has an adjusted gross income of $30,000. (a) What is the amount of Sleepy's personal casualty loss on the car for the year?(b) What is the amount of Sleepy's personal casualty gain on the vase for the year?(c) What is the character of those gains and losses?(d) To what extent are Sleepy's losses deductible?(e) Is the deduction an itemized deduction? (f) what results in (a)-(e), above, if Sleepy recovers only $12,000 in insurance for the vase? (g) What difference in the results above is Sleepy avoids the insurance company and does not collect the $1,000 of auto insurance because she fears the company will cancel her policy? (see internal revenue code section 165(h)(4)(E).
Explanation / Answer
Answer:(a) $5900 (8000 – 1000 insurance – 1000 value after crash- 165(h) limitation of over $100)
Answer:(b) 10000 gain
Answer:(c) 165(h)(2)(B)- Treated as capital asset now even if there was no sale or exchange b/c gains exceed losses….Car held for 3 yrs and vase for 2 yrs, thus loss is LTCL and gain is LTCG
Answer:(d) When gains exceed the losses….Losses are going to be deductible only to the extent of the gain……$5900 capital loss wipes out $5900 from 10K gain leaving 4100 LTCG
Answer:(e) NO, deduction above the line courtesy of § 62 b/c we are going to treat transaction as a sale or transaction as result of 165(h)(2)(B)
Answer:(f) (1) 165(h)(2)(A) – If personal casualty losses exceed personal casualty gains such losses shall be allowed for yr only to the sum of the personal casualty gain and then only the excess of any amount over 10% of AGI of taxpayer (Ordinary loss pro- duced)
(2) 5900 Personal casualty loss……we wipe out the 2K gain…3900 left in loss subject to 10% rule ……$900 Loss left for itemized deduction below the line [Non-Misc loss § 67(b)(3) meaning gets to deduct 100% of this $900]
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