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Tracing rules for loan proceeds & land developer gain

Case 1:

A lawyer withdraws his entire capital account from his law firm and uses the funds to finance the purchase of a home in which he resides. On the same day, the lawyer borrows an equivalent amount of funds by way of bank loan and deposits the funds to his law firm.

Issue: Is the interest expense on the bank loan deductible for tax purposes by the lawyer?

Case 2:

An accountant, whose entire practice consists of real estate agents and real estate developers, purchased, on the advice of a client, a parcel of raw land two years ago for $50,000. The accountant today accepted an offer to purchase the land from a third party for $125,000. The third party is going to use the parcel of land as part of a golf course development. Disposition costs will amount to $15,000.

1. What is the amount of the gain to be reported by the accountant for income tax purposes?
2. Advise the accountant on the nature of taxation of his gain on the sale of the land for income tax purposes

Solution Preview

Case 1:
The issue of where the interest can be deducted is first determined by tracing the use of the funds as specified in Temp Reg 1.163-8T. The tracing rules would say that the funds were traced to the business and therefore the interest would be deductible only as investment interest, ...

Solution Summary

The solution explains some very special rules about deductibility for interest on loans. The second question deals with criteria to determine who is a land developer.