Exam 28: Property Transactions: Section 1231 and Recapture

Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

Trena LLC, a tax partnership owned equally by Trent and Nina, sells a building it had placed in service five years ago. Sec. 291 will require that part of the gain (up to 20% of accumulated depreciation) be treated as ordinary gain, with the balance treated as Sec. 1231 gain.

The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.

Which of the following assets is 1231 property?

When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

Jillian, whose tax rate is 39.6%, had the following sales of Section 1231 property this year: Sale of land A at a gain of $15,000 Sale of land B at a gain of $12,000 Sale of land C at a loss of $8,000 a. What is the amount of her resulting tax liability? b. Assume instead that Jillian has a 15% marginal tax rate. What is the amount of her resulting tax liability? c. Assume instead that Jillian has a 28% marginal tax rate. What is the amount of her resulting tax liability?

Eric purchased a building in 2005 that he uses in his business. Eric uses the straight-line method for the building. Eric's original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are

Clarise bought a building three years ago for $180,000 to use in her business. The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed. During the current year, Clarise sells the building to her wholly-owned corporation for $235,000. The tax results to Clarise are

Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.

What is the purpose of Sec. 1245 and what is its significance?

Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and $158,000 FMV), which are used in Cassie's business. Cassie has used straight-line depreciation for both assets, which were acquired two years ago. Both the equipment and the building are destroyed in a fire, and Cassie collects insurance proceeds equal to the assets' FMV. The tax result to Cassie for this transaction is a

Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is

Aamir has $25,000 of net Sec. 1231 gains this year on business assets. In addition, incurred $18,000 of loss on the sale of stock held six months. Aamir will include in his AGI

With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except

Why did Congress establish favorable treatment for 1231 assets?

All of the following are considered related parties for purposes of Sec. 1239 recapture with the exception of

In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.

In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report

Echo Corporation plans to sell a small building to Nate, its 65% shareholder. The building was placed in service five years ago. An independent appraisal will be obtained to set the selling price at an appropriate market price, and a $50,000 gain is expected to result. The only asset previously sold by Echo was a stock investment five years ago which resulted in a $40,000 loss. If the sale of the building closes before year-end, the gain on the building will allow recognition of the capital loss carryover before it expires.

During the current year, Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land. Prior to this, Kayla's only Section 1231 item was a $10,000 loss six years ago. Kayla is in the 28% marginal tax bracket. The amount of tax resulting from these transactions is