Deck 10: Property Transactions: Determination of Basis and Gains and Losses

Question 1

David Dawson owned two shares of a corporation's common stock. He paid $60 for one share and $30 for the other share. fte corporation declared a stock dividend which gave stockholders two new shares of common stock for each share they held. After the distribution, David owns six shares of stock with an adjusted basis of $15 each.

Answer 1

False
David owns three shares with an adjusted basis of $20 each and three shares with an adjusted basis of $10 each.

Question 2

When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject.

Answer 2

True
Cost includes cash paid and any debt to which the property is subject.

Question 3

In 2012, Tom Turner received a gift of property that had a fair market value of $10,000 at the time of the gift. fte donor's adjusted basis in the property at the time of the gift was $12,000. Tom's basis for computing depreciation is $12,000.

Answer 3

True

Question 4

fte basis of property acquired from a decedent is the fair market value of the property at the date of receipt of the property.

Question 5

Increases in basis decrease the amount of gain realized or increase the amount of realized loss.

Question 6

Gains are recognized on sales involving property used for business or income-producing purposes or for personal purposes.

Question 7

Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. fte $5,000 cost is an addition to the basis of the land.

Question 8

fte adjusted basis of property is its cost plus capital recoveries less capital expenditures.

Question 9

fte basis of property acquired by inheritance is the lower of the decedent's adjusted basis or the fair market value on the date of the death of the decedent.

Question 10

When new stock received as a dividend is identical to the old stock on which the dividend is declared, the adjusted basis of the old stock must be apportioned among the shares of old stock and the shares of new stock received as a dividend.

Question 11

Richard Rhodes sold his warehouse at a loss to his brother. fte loss is deductible by Richard.

Question 12

In a gain situation, the holding period of gift property begins on the date of the gift.

Question 13

If nontaxable stock rights are allowed to expire, they have no basis.

Question 14

If a wife sells depreciable property to her husband, the gain on the sale is treated as ordinary income.

Question 15

To determine the initial basis of purchased property, cost is used unless it is a bargain transaction in which case its fair market value is used.

Question 16

fte holding period of property acquired from a decedent is considered to be long term regardless of when the property was acquired or disposed of.

Question 17

fte fair market value of taxable stock rights at the date of distribution represents both the amount of income and the basis of the rights.

Question 18

During 2012, Carl Crofts received a gift of property having a fair market value of $25,000 at the time of the gift. fte donor's adjusted basis in the property at the time of the gift was $21,000. fte donor paid a gift tax of $700 on the property. Carl's basis in the property is $21,700.

Question 19

Depreciation, depletion, amortization, and acquisition costs are all capital returns.

Question 20

fte basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use.

Question 21

Which of the following items is not a reduction to the basis of an asset?

A) Depreciation
B) Assessments for maintenance of sidewalks
C) Cash rebate from manufacturer
D) Casualty losses

Question 22

Brenda Baines sells land to Carla Chandler for $15,000 cash and a piece of equipment with an adjusted basis of $15,000 and a fair market value of $20,000. fte land was subject to a $25,000 mortgage which Carla assumed. Brenda incurred $2,500 in selling expenses. What is the amount realized by Brenda?

A) $55,000
B) $60,000
C) $52,500
D) $57,500

Question 23

Dan Danielson bought 100 shares of stock on October 20, 2012. On December 23, 2012, Dan died and his son David inherited the stock. David's basis in the stock is the fair market value at the time of Dan's death.

Question 24

Leonard Lambert's commercial building, which had an adjusted basis of $500,000, was partially destroyed by fire. fte fair market value was $800,000 just before the fire and $600,000 immediately after. Leonard received $150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonard's basis in the building before any repairs are made?

A) $300,000
B) $350,000
C) $450,000
D) $500,000
E) $600,000

Question 25

Property converted to business use is sold. fte adjusted basis of the property at the time of conversion is used to determine the gain.

Question 26

All costs necessary to get depreciable property in place and ready for use are deductible in the year in which they are paid or incurred.

Question 27

Elizabeth Eason constructed an asset to be used in her business-a sole proprietorship. fte basis she used for the finished asset should include the employee compensation for the work attributable to the construction of the asset.

Question 28

In 2012, Bob Brown's aunt Barbara gave him a house. At the time of the gift, the house had a fair market value of $193,000, the taxable gift was $180,000, and his aunt's adjusted basis was $73,000. His aunt paid a gift tax of $30,000 on the house. What is Bob's basis in the house for purposes of determining gain?

A) $73,000
B) $93,000
C) $180,000
D) $193,000

Question 29

Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2012, for $4,000. On March 29, 2012, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem's recognized loss on the sale is:

A) $1,000
B) $500
C) $1,500
D) $0

Question 30

John Johnson sold his hot dog stand at a loss to his brother. fte loss is deductible by John.

Question 31

Isabella Iverson bought a new car for $17,500. She received a rebate from the manufacturer in the amount of
$1,000. Her basis in the car is $17,500.

Question 32

Bill Burns purchases furniture from his employer for $5,000 during 2012. fte fair market value of the furniture is $8,500. What is Bill's basis in the furniture?

A) $5,000
B) $8,500
C) $12,500
D) $2,500

Question 33

Marcia Marks received as a wedding present from an old friend a gold necklace worth $22,000. fte necklace had been purchased by the friend for $25,000. fte friend did not pay any gift tax. Marcia ran into some financial difficulty and sold the necklace for $23,000. Marcia must recognize a gain of $1,000.
35. 500 shares of the Yellow Brick Construction Company were sold for $10,000, its fair market value, by Esmeralda Emerson to her sister, Topaz, for $8,500. Esmeralda has a nondeductible loss of $1,500.

Question 34

Brian Brewster sold property to a buyer who paid him $400,000 cash and assumed an existing mortgage of $150,000. fte property had cost $250,000 and he had made improvements of $50,000. Depreciation of
$100,000 has been claimed and selling expenses were $20,000. What is the amount of gain?

A) $100,000
B) $200,000
C) $250,000
D) $280,000
E) $330,000

Question 35

ftere is a basis adjustment for estate taxes paid on property acquired from a decedent that is similar to the gift tax adjustment of gifted property.

Question 36

In 2012, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold?

A) $0
B) $20,000
C) $30,000
D) $50,000
E) $70,000

Question 37

fte wash sale rules merely postpone the loss until the taxpayer sells the securities in a nonwash sale transaction.

Question 38

For purposes of the related party rules, the taxpayer's parents are "related persons," but the taxpayer's siblings (brothers and sisters) are not.

Question 39

Gains and losses resulting from mere appreciation or decline in value are unrealized gains and losses, and are not included in the calculation of taxable income.

Question 40

Unless the taxpayer can specifically identify the shares of stock that are sold or transferred, the FIFO rule comes into play (i.e., the stock sold is charged against the earliest of the stock purchases).

Question 41

Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of distribution, the fair market value of the common stock was $75 per share and the fair market value of the preferred was $100 per share. What is the new basis, per share, of the preferred stock?

A) $75.00
B) $50.00
C) $100.00
D) $66.67

Question 42

Bill Burns purchases furniture from his employer for $5,000 during 2012. fte fair market value of the furniture is $8,500. What amount, if any, must Bill include as income for 2012?

A) $0
B) $5,000
C) $7,500
D) $3,500

Question 43

February 20, 2012: Lee Ranger purchased 100 shares of Pine Corp. stock for $30 a share. April 7, 2012: Lee sold 50 shares of Pine Corp. stock for $20 a share. April 24, 2012: Lee purchased 25 shares of Pine Corp. stock for $25 a share.
What is the basis of the 25 shares purchased on April 24, 2012?

A) $625
B) $875
C) $1,125
D) $750

Question 44

Kurt Kramer purchased stock five years ago for $12,000 which he gave to Jim Jensen when its fair market value was $9,000. Subsequently, Jim sold the stock for $7,500. What is the amount of Jim's loss on the sale?

A) $3,000
B) $1,500
C) $4,500
D) $2,000

Question 45

When a taxpayer realizes a loss on the sale of securities and purchases the same or substantially identical securities within 61 days surrounding the date of the sale, this is known as:

A) a related-party transaction.
B) a wash sale.
C) a basket purchase.
D) none of the above.

Question 46

On January 6, 2012, Sally Strom purchased 300 shares of common stock in Corporation XYZ for $120 per share. Four months later she purchased 100 additional shares at $180 per share. On December 13, 2012, Sally received a 20 percent nontaxable stock dividend. What is Sally's basis in each share of stock after the stock dividend?

A) 480 shares at $112.50 per share
B) 360 shares at $120 per share and 120 shares at $180 per share
C) 360 shares at $120 per share and 120 shares at $150 per share
D) 360 shares at $100 per share and 120 shares at $150 per share

Question 47

Losses between related parties are:

A) always realized, but never recognized.
B) always recognized, but never realized.
C) always realized and recognized.
D) never realized and recognized.

Question 48

Kent Knobe gave Larry Lawson a gift having a fair market value of $133,000 on February 14, 2012. Kent had purchased the gift property in 2004 for $93,000, the taxable gift was $120,000, and paid a gift tax of $15,000. What is Larry's basis in the property?

A) $93,000
B) $120,000
C) $98,000
D) $108,000
E) $133,000

Question 49

In 2012, Leon Longrove sold a piece of business equipment that had an adjusted basis to him of $50,000 for $75,000 cash plus artwork that had a fair market value of $25,000. fte buyer assumed Leon's $20,000 loan on the equipment. Leon paid $5,000 in selling expenses. What is the amount of Leon's gain on the sale?

A) $25,000
B) $45,000
C) $65,000
D) $75,000
E) None of the above

Question 50

When taxpayers sell property in an installment sale and realize gain, they generally recognize the gain:

A) in the first year in which an installment payment is received.
B) over the tax years in which they collect the proceeds from the sale.
C) at the time of the sale.
D) none of the above.

Question 51

Which of the following statements is not true concerning installment reporting?

A) At least one payment is to be received after the close of the year in which a sale of property is made.
B) fte installment method allows gain to be spread over more than one year.
C) fte gross profit rate is used to determine the portion of the payment received that is reported as income.
D) An advantage of the installment method is that the dollar amount of income recognized from each payment never varies from year to year.

Question 52

Freda Freemont receives a nontaxable stock dividend of 30 shares of preferred stock on her Georgia Corporation common stock. Freda purchased the 200 shares of common stock two years ago for $12,000. On the date of distribution, the fair market value of the common stock was $75 per share and the fair market value of the preferred was $100 per share. What is the new basis, per share, of the common stock?

A) $75.00
B) $50.00
C) $100.00
D) $66.67

Question 53

Bob Bixby gave his daughter, Jane, his personal residence with an adjusted basis to him of $260,000 and a fair market value of $250,000. Jane lived in the house for two years and then sold it for $240,000. As a result of the sale, Jane will:

A) Report no gain or loss
B) Report a $10,000 loss
C) Report a $20,000 loss
D) Have her father report a $20,000 loss

Question 54

George Greco gave Harold Hudson property which George acquired five years ago for $15,000. At the time of the gift, the property's fair market value was $35,000. Harold subsequently sold the property for $40,000. What amount of gain did Harold realize?

A) $20,000
B) $25,000
C) $5,000
D) $40,000

Question 55

Joe Jimson died in 2012. Property with an adjusted basis of $60,000 and a fair market value of $120,000 went to Joe's beneficiary. fte executor chose the alternate valuation date when the value was $112,000. fte property was distributed four months after Joe's death when the fair market value was $115,000. What is the basis of the property to the beneficiary?

A) $60,000
B) $112,000
C) $115,000
D) $120,000

Question 56

Recognized gain or loss is the term used to describe:

A) a taxpayer's amount of true economic gain or loss when property is disposed.
B) the amount of realized gain or loss taxpayers report on their tax returns.
C) an amount that does not affect the taxpayer's tax liability.
D) none of the above.

Question 57

On October 7, 2012, Grace Gems purchased a going business for the lump-sum price of $200,000. fte fair market values of the assets Grace purchased were as follows: What is Grace's basis in the building?

A) $90,000
B) $95,000
C) $100,000
D) $102,500
E) None of the above

Question 58

On January 1, 2012, Daniel Durrow owned rental property which had an adjusted basis to him of $250,000. Daniel made the following expenditures during 2012:

A) $225,000
B) $240,000
C) $260,000
D) $275,000
E) None of the above

Question 59

Doug Doolittle receives a nontaxable stock dividend of 20 shares of Edwards Corporation common stock with a fair market value at distribution of $800. Doug previously owned 100 shares of Edwards Corporation common stock which he purchased three years ago for $6,000. fte basis per share of the 20 shares of Edwards Corporation stock is:

A) $0
B) $40
C) $50
D) $60

Question 60

Ralph Rugby wanted to sell 100 shares of a stock that had suffered a serious decline in value. Several members of his family were interested in purchasing the stock. In order to preserve the loss deduction, which of the following family members should Ralph sell his stock to?

A) Grandfather
B) Half-sister
C) Ralph, Inc. (Ralph's 51% owned corporation)
D) Cousin

Question 61

North Enterprises sells land for $15,000 cash and machinery worth $20,000. fte other party's adjusted basis in the machinery is $8,000. fte land was subject to a $25,000 mortgage, which the other party assumes. North incurs $2,000 of selling expenses on the sale. What is North's amount realized from the sale?

A) $58,000.
B) $60,000.
C) $23,000.
D) $33,000.
E) $35,000.

Question 62

Brian Bradley purchased property for $50,000 in 2004. fte property was valued at $200,000 on May 14, 2012, when Brian died. His daughter Anita inherited the property. Six months later, on November 14, 2012, the property was valued at $170,000.
(a.) What is Anita's basis in the property?
(b.) If the executor of Brian's estate elected the alternate valuation date, what is Anita's basis?
(c.) If the executor elected the alternate valuation date but distributed the property on August 18, 2012, what is Anita's basis?
(d.) If the executor elected the alternate valuation date, but distributed the property on December 22, 2012, what is Anita's basis?
(e.) If Anita sells the property on December 27, 2012, will she have short-term or long-term gain or loss?

Question 63

In 2008, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2012, Jane purchases an additional 250 shares of ABC common stock for $600. On September 5, 2012, she sells the 1,000 shares purchased in 2008 for $1,800. Jane's basis in the shares of stock purchased on August 27, 2012 is:

A) $75.
B) $425.
C) $600.
D) $775.
E) $1,125.

Question 64

Ronald Rankin owns 1,000 shares of Royal Corp. common stock with a basis of $30,000. He receives a 10 percent taxable stock dividend when the FMV of each share of stock is $15. How much income does he have? What is the basis in the new shares? When does the holding period of the new shares begin? What is the basis in the old stock?

Question 65

On April 18, 2012, Jim Jenkins sold 300 shares of Redwood Corporation common stock for $8,400. Jim acquired the stock in 2008 at a cost of $10,000. On May 9, 2012, he repurchased 150 shares of Redwood Corporation common stock for $3,600 and held them until August 25, 2012, when he sold them for $6,000. How should Jim report the above transactions for 2012?

Question 66

Becky Bell owned common stock in a corporation that she purchased two years ago for $25,000. On June 6, 2012, Becky sold the stock for its $11,000 fair market value to her son, Max Monroe. On December 19, 2012, Max sells the stock to an unrelated party for its $13,000 fair market value. How much gain or loss will Becky and Max recognize on their respective income tax returns for 2012?

A) $0 and $0, respectively.
B) ($14,000) and $0, respectively.
C) ($14,000) and $2,000, respectively.
D) $0 and $2,000, respectively.
E) None of the above.

Question 67

Nancy Nelson pays $200,000 for land and a building in a single transaction. At the time of the purchase, the land and building were appraised at $120,000 and $180,000, respectively. Nancy's depreciable basis in the building is:

A) $0.
B) $100,000.
C) $80,000.
D) $120,000.
E) $180,000.

Question 68

Margo Manor has a Victorian style residence with an adjusted basis of $200,000 and a fair market value of
$150,000. Because of the unique styling of the home, she decided to convert it to rental property. One year later, after taking depreciation of $15,000, she is considering selling the property. Determine the results if she sells the property for:
(a.) $130,000
(b.) $165,000
(c.) $220,000

Question 69

Douglas Duke received a summer home from his father as a gift in 2012. fte fair market value at the time of the gift was $90,000 (this was also the taxable gift), and it had an adjusted basis to the father of $50,000. fte father paid $9,000 in gift tax. What is Douglas's basis in the property?

A) $41,000
B) $50,000
C) $54,000
D) $59,000
E) $90,000

Question 70

Leonard London sold a building used in his business to Michelle Martinson. He had purchased the property several years previously for $340,000, $300,000 of which was the mortgage. Major improvements in the amount of $240,000 had been made. At the time of the sale, Leonard had taken $220,000 in straight-line depreciation. Leonard paid $104,000 in selling expenses. Michelle gave Leonard $400,000 in cash and unlike property with a fair market value of $240,000, assumed a delinquent real estate bill of $105,000 and assumed Leonard's mortgage on the property in the amount of $234,000. What is Leonard's gain on the sale?

A) $191,000
B) $385,000
C) $410,000
D) $503,000
E) $515,000

Question 71

On January 1, 2010, Jane Judge paid $12,000 for taxable bonds with a face value of $10,000 that mature on January 1, 2020. She sells them on December 31, 2012, for $11,000. What are the tax consequences for Jane?

Question 72

Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6 per share in 2008. On September 26, 2012, he received 1,000 nontaxable stock rights entitling him to buy 200 additional shares of Patrick Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value of the stock was $12.50 per share ex-rights and that of the rights was $2.50 each. Stanley sold 500 of the rights for $1,100 on October 24, 2012, and let the other 500 rights expire.
(a.) What is the gain or loss that Stanley should report in 2012?
(b.) What gain or loss should Stanley report if the value of the rights were $1.25 instead of $2.50?

Question 73

Albert Arnett's personal residence cost him $70,000, and it had a fair market value of $64,000 when it was converted to rental use. Albert claimed $4,000 depreciation during the time it was rented. fte rental building was sold for $62,000. What is his gain or loss?

A) ($8,000) loss
B) ($4,000) loss
C) ($2,000) loss
D) no gain or loss
E) $2,000 gain

Question 74

In November 2012, Bill Barley sells property with an adjusted basis of $50,000 for $200,000. fte buyer pays Bill
$40,000 cash at the time of sale transaction with the remaining $160,000 to be paid in five annual installments of $32,000 beginning in November 2013 with interest at 10 percent.
(a.) What is the amount of income to be reported by Bill in 2012? (b.) What is the amount of income to be reported in later years? In both cases, ignore interest.

Question 75

Jay Jamison sold property to Joan Jacobs. Joan paid $100,000 in cash and $20,000 in other property (fair market value). fte property sold by Jay was subject to an $80,000 mortgage, which Joan assumed. Jay paid a $7,200 sales commission and $5,000 in property taxes. Jay had purchased the property three years before for $120,000- $20,000 in cash and a $100,000 mortgage. Jay had added $20,000 in improvements during the period of time in which he held the property. What is Jay's realized gain or loss on this transaction?

A) ($32,200) loss
B) ($27,200) loss
C) $47,800 gain
D) $52,800 gain
E) $112,000 gain

Question 76

Norman Nelson owns 1,000 shares of Newton Corp. common stock which he purchased for $60,000 and later receives a nontaxable preferred stock dividend of 300 shares of Newton preferred stock when the FMV of the preferred was $100 per share and the FMV of the common was $90 per share. What is the basis of the common and preferred shares after the dividend?

Question 77

In 2008, Jane Jones pays $2,500 for 1,000 shares of ABC common stock. On August 27, 2012, Jane purchases an additional 250 shares of ABC common stock for $600. On September 5, 2012, she sells the 1,000 shares purchased in 2008 for $1,800. Jane's recognized loss on the sale is:

A) $0.
B) $175.
C) $350.
D) $525.
E) $700.

Question 78

Joe Juggler sold some common stock to his brother Tim for $12,000, the current market price. He paid $15,000 for the stock two years ago. fte stock market recovered rapidly and three months later Tim sold the stock to a business acquaintance for $16,000. How much gain or loss should Joe and Tim report?

Question 79

Wilma Waters purchased land from Carl Carmichael for $32,000 cash, the assumption of an existing mortgage of $43,000, and payment of delinquent back taxes of $8,300. Carl's adjusted basis in the land that he had purchased as an investment was $85,000. Carl also incurred $9,330 in selling costs. What is Carl's recognized gain or loss?

A) ($19,330)
B) ($11,030)
C) ($1,700)
D) $7,630
E) $11, 030

Question 80

Betty Bell owns 1000 shares of Banner Corp. stock purchased in January 2010 for $30,000. On January 11, 2012, she receives 300 taxable stock rights valued at $6 with the right to purchase additional shares at $32.
(a.) How much income does Betty have? What is the basis in the rights? When does the holding period of the rights begin?
(b.) On February 19, 2013, Brian exercises 150 rights and sells the remaining 150 rights for $8 each. What is the basis of each new share? When does the holding period begin? How much and what kind of gain does she have on the sale of the rights?