Exam 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

On June 10, 2018, Ebon, Inc. acquired an office building as a result of a like-kind exchange. Ebon had given up a factory building that it had owned for 26 months as part of the like-kind exchange. Which of the following statements is correct?

The Code contains two major depreciation recapture provisions: § 1245 and § 1250.

Judith (now 37 years old) owns a collection of porcelain dolls that she acquired when she was a grade-schooler. She had forgotten about them until her mother sent them to her. Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it. Judith had originally acquired all the dolls as gifts from her parents, so she has no way to establish a basis for them. Using information from the Internet, she prepares a careful inventory of the dolls that includes their name, when they were first available for sale, their current value, and other pertinent information. She then lists them for sale on the Internet. To her surprise, she quickly gets an offer of $5,000 for all of them, which she accepts. Judith has no other gain or loss transactions for the year and is in the 24% marginal tax bracket. What issues do these facts create?

Copper Corporation sold machinery for $47,000 on December 31, 2019. The machinery had been purchased on January 2, 2016, for $60,000 and had an adjusted basis of $41,000 at the date of the sale. For 2019, what should Copper report?

The possible holding periods for capital assets include:

Section 1245 applies to amortizable § 197 intangible assets.

If § 1231 asset casualty gains and losses net to a gain, the gain is treated as a § 1231 gain.

Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.

Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.

An individual taxpayer received a valuable painting from his uncle, a famous artist who painted it. After the taxpayer held the painting for two years, he sold it for a $400,000 gain. The gain is a long-term capital gain.

Phil's father who died on January 10, 2019 had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10, 2018, when the stock was worth $430,000. Phil's father had paid no gift taxes. This stock was worth $566,000 at the date of the father's death. Phil sold the stock for $545,000 net of commissions on February 23, 2019. What is the amount and nature of his gain or loss from disposition of this property?

Section 1245 depreciation recapture potential does not carry over from a deceased taxpayer to the beneficiary taxpayer.

Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?

Collectibles that are held long-term and sold at a gain are subject to maximum tax rate of 28%. An individual taxpayer recently sold an antique car for $40,000. The taxpayer had originally paid $30,000 for the car and had held it for for several years . Explain why the car is or is not a collectible.

A sheep must be held more than 18 months to qualify as a § 1231 asset.

An individual has the following recognized gains and losses from disposition of § 1231 assets (all were vacant land): $15,000 gain, $10,000 loss, $25,000 gain, and $2,000 loss. The individual has a $5,500 § 1231 lookback loss. The individual also has a $16,000 net short-term capital loss from the disposition of stock. Which of the following statements is correct?

Orange Company had machinery completely destroyed by a fire on December 23, 2019. The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200. Orange received $30,000 of insurance proceeds for the machinery and did not replace it. This was Orange's only casualty or theft event for the year. As a result of this event, Orange has:

Carol had the following transactions during 2019: a painting held for two years and sold at a gain of $85,000; 100 shares of Gray stock held six months and sold for a loss of $6,000; 50 shares of Yellow stock held 18 months and sold for a gain of $36,000. Carol also had $264,000 of taxable income from other sources than these property transactions. What is Carol's net capital gain or loss and what is her taxable income?

The effect of § 1244 may be to convert a capital loss into an ordinary loss deductible for adjusted gross income.

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.