Exam 11: Investments

Which of the following types of interest income is not taxed as it is earned?

Roy, a resident of Michigan, owns 25 percent of a fourplex in the nearby college town of Ann Arbor with three other friends. The fourplex is rented to students who attend the University of Michigan. Roy's responsibility is to approve new tenants each year and take care of any maintenance issues. During the year, the rental property generated a $25,000 loss which was split equally among Roy and his three friends. Assuming Roy's only source of income was $145,000 of salary, how much of the rental loss can Roy deduct this year and what amount must be carried forward?

Unused investment interest expense:

On January 1, 20X1, Fred purchased a corporate bond with a face value of $50,000 from the secondary market at a premium. The bond has a coupon rate of 8 percent and matures in five years. The market rate of the bond is a 6 percent annual before-tax return compounded semiannually. If Fred was trying to minimize interest income, what is the least amount of interest income Fred may report on his 20X1 tax return?