Deck 16: Property Transactions Capital Gains and Losses

Question 1

The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.

Answer 1

False

Question 2

To compute the holding period,start counting on the day after the property was acquired and include the day of disposition.

Answer 2

True

Question 3

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating.The taxpayer immediately sells the note to a bank for less than the note's stated value.The taxpayer has an ordinary loss.

Answer 3

True

Question 4

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

Question 5

The only things that the grantee of an option may do with the option are exercise it or let it expire.

Question 6

An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter created the painting.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.

Question 7

For tax purposes,there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.

Question 8

A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000.The taxpayer held the property for more than a year.The taxpayer has an $8,000 capital loss.

Question 9

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless.The taxpayer is single and the loss is $30,000.The loss is treated as an ordinary loss.

Question 10

Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.

Question 11

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

Question 12

The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.

Question 13

Tom has owned 40 shares of Orange Corporation stock for five years.He sells the stock short for a total of $1,100.One month later,he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600.Tom has a $500 short-term capital gain.

Question 14

Individuals who are not professional real estate developers may get capital gain treatment for sale of their real property if they engage only in limited development activities.

Question 15

When a patent is transferred,the most common forms of payment received by the transferor are a lump sum and/or periodic payment.

Question 16

If the holder of an option fails to exercise the option,the lapse of the option is considered a sale or exchange on the option expiration date.

Question 17

A franchisor licenses its mode of business operation to a franchisee.

Question 18

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Question 19

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

Question 20

If a capital asset is sold at a gain,the holding period is important.

Question 21

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.Lana amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

A)Lana has $10 of long-term capital loss.
B)Lana has $190 of long-term capital gain.
C)Lana has no capital gain or loss.
D)Lana has $190 of long-term capital loss.
E)None of the above.

Question 22

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

Question 23

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:

A)Ordinary income of $45,000.
B)Long-term capital gain of $45,000.
C)Short-term capital gain of $45,000.
D)Neither gain nor loss.
E)None of the above.

Question 24

Virgil was leasing an apartment from Marple,Inc.Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building.As a result:

A)Virgil has a $1,000 capital gain.
B)Virgil has a $1,000 capital loss.
C)Marple has a $1,000 capital loss.
D)Marple has a $1,000 capital gain.
E)None of the above.

Question 25

Hiram is a computer engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hiram has a zero tax basis for the patent.In consideration of $800,000 plus a $1 royalty per device sold,Hiram assigns the patent to a computer manufacturing company.Hiram assigned all substantial rights in the patent.Which of the following is correct?

A)Hiram automatically has long-term capital gain from the lump sum payment,but not from the royalty payments.
B)Hiram automatically has long-term capital gain from the royalty payments,but not from the lump sum payment.
C)Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.
D)Hiram does not have automatic long-term capital gain from either the lump sum payment or the royalty payments.
E)None of the above.

Question 26

Tan,Inc. ,sold a forklift on April 12,2016,for $8,000 (its FMV)to its 100% shareholder,Ashley.Tan's adjusted basis for the forklift was $12,000.Ashley's holding period for the forklift:

A)Includes Tan's holding period for the forklift.
B)Begins on April 12,2016.
C)Begins on April 13,2016.
D)Does not begin until Ashley sells the forklift.
E)None of the above.

Question 27

On June 10,2016,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 statements below is correct?

A)The holding period of the factory building includes the holding period of the office building.
B)The holding period of the office building starts on June 11,2016.
C)The holding period of the office building starts on June 10,2016.
D)The holding period of the office building includes the holding period of the factory building.
E)None of the above.

Question 28

A business taxpayer sells inventory for $80,000.The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year.The taxpayer has:

A)No gain or loss.
B)Sold a long-term capital asset.
C)Sold a short-term capital asset.
D)An ordinary gain.
E)None of the above.

Question 29

The possible holding periods for capital assets include:

A)Short-term = held 14 months or less.
B)Long-term = greater than six months.
C)Long-term = greater than 12 months.
D)Short-term = greater than 12 months.
E)None of the above.

Question 30

Stanley operates a restaurant as a sole proprietorship.Which of the following items are capital assets in the hands of Stanley?

A)The restaurant's tables and chairs.
B)A portable sound system used to play "theme music" for the restaurant.
C)The restaurant building that is an asset of the sole proprietorship.
D)An interest-bearing savings account used to keep the restaurant's excess cash.
E)None of the above.

Question 31

A worthless security had a holding period of 6 months when it became worthless on December 10,2016.The investor who had owned the security had a basis of $20,000 for it.Which of the following statements is correct?

A)The investor has a long-term capital loss of $20,000.
B)The investor has a short-term capital loss of $20,000.
C)The investor has a nondeductible loss of $20,000.
D)The investor has a short-term capital gain of $20,000.
E)None of the above.

Question 32

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Question 33

On June 1,2016,Brady purchased an option to buy 1,000 shares of General,Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year,so Brady decided to let the option lapse as of December 1,2016.On his 2016 tax return,what should Brady report?

A)A $3,000 long-term capital loss.
B)A $3,000 short-term capital loss.
C)A $3,000 § 1231 loss.
D)A $3,000 ordinary loss.
E)None of the above.

Question 34

All collectibles short-term gain is subject to a potential alternative tax rate of 28%.

Question 35

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

A)The option is exercised.
B)The option is sold.
C)The option lapses.
D)The option is rescinded.
E)None of the above.

Question 36

An individual taxpayer with 2016 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2017.

Question 37

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15%/20% net long-term capital gain.

Question 38

Stella purchased vacant land in 2009 that she subdivided for resale as lots.All 10 of the lots were sold during 2016.The lots had a tax basis of $12,000 each and sold for $35,000 each.Stella made no substantial improvements to the lots.She acted as her own real estate broker;so there were no sales expenses for selling the lots.Which of the following statements is correct?

A)Stella must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B)The $230,000 gain from the sale of the ten lots is all ordinary income.
C)All of the $230,000 gain from the sale of the ten lots is long-term capital gain.
D)To be eligible for the special capital gain treatment of § 1237,Stella must be a real estate dealer.
E)None of the above.

Question 39

Gold Company signs a 13-year franchise agreement with Silver.Silver retained significant powers,rights,and a continuing interest.Gold Company (the franchisee)makes noncontingent payments of $18,000 per year for the first four years of the franchise.Gold Company also pays a contingent fee of 2% of gross sales every month.Which of the following statements is correct?

A)Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.
B)Gold Company may deduct the monthly contingent fee as it is paid.
C)Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of the above.

Question 40

Recognized gains and losses from disposition of a capital asset may occur as a result of a:

A)Sale.
B)Exchange.
C)Casualty.
D)Condemnation.
E)All of the above.

Question 41

Which of the following is correct concerning short sales of stock?

A)At the time the short sale is made,the taxpayer does not deliver to the purchaser the shares sold short.
B)At the time the short sale is made,the taxpayer delivers to the purchaser the shares sold short.
C)At the time the short sale is made,the taxpayer may already own the shares sold short.
D)At the time the short sale is made,the taxpayer always already owns the shares sold short.
E)None of the above.

Question 42

Ryan has the following capital gains and losses for 2016: $6,000 STCL,$5,000 28% gain,$2,000 25% gain,and $6,000 0%/15%/20% gain.Which of the following is correct:

A)The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.
B)The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain.
C)The net capital gain is composed of $3,000 28% gain,$2,000 25% gain,and $2,000 0%/15%/20% gain.
D)The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain.
E)None of the above.

Question 43

Theresa and Oliver,married filing jointly,and both over 65 years of age,have no dependents.Their 2016 income tax facts are:
Theresa's wages
$165,000
Oliver's wages
33,000
Short-term capital gain
36,000
Long-term capital loss
(41,000)
What is their taxable income for 2016?

Question 44

Cason is filing as single and has 2016 taxable income of $36,000 which includes $34,000 of 0%/15%/20% net long-term capital gain.What is his tax on taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.

A)$0
B)$200
C)$300
D)$4,936
E)None of the above

Question 45

On January 10,2016,Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2012 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1,2016,the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?

Question 46

In 2015,Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction.In 2016,Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions.Which of the statements below is correct for 2016?

A)Jenny has a $18,000 net capital gain.
B)Jenny has a $9,000 net capital gain.
C)Jenny has a $9,000 net capital loss.
D)Jenny has a $3,000 capital loss deduction.
E)Jenny has a $9,000 capital loss deduction.

Question 47

Which of the following comparisons is correct?

A)Corporations may carryback capital losses;individuals may not.
B)Both corporation and individual long-term capital losses carryover as short-term capital losses.
C)Corporations may carryforward capital losses indefinitely;individuals may only carryforward capital losses for five years.
D)Both corporations and individuals may use an alternative tax rate on net capital gains.
E)None of the above.

Question 48

Carol had the following transactions during 2016: 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?

Question 49

In 2016,Satesh has $5,000 short-term capital loss,$13,000 0%/15%/20% long-term capital gain,and $7,000 qualified dividend income.Satesh is single and has other taxable income of $15,000.Which of the following statements is correct?

A)No more than $13,000 of Satesh's taxable income is taxed at 0%.
B)No more than $7,000 of Satesh's taxable income is taxed at 0%.
C)No more than $15,000 of Satesh's taxable income is taxed at 0%.
D)None of Satesh's taxable income is taxed at 0%.
E)All of Satesh's taxable income is taxed at 0%.

Question 50

Larry was the holder of a patent on a video game.During 2016,he sold all substantial rights in the patent for $365,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $86,000 basis for the patent.During 2016,he received $30,000 in royalties.What is the nature and amount of Larry's gain?

Question 51

On January 18,2015,Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11,2016,she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300.On February 10,2017,Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2015.On that date,Blue Corporation stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2016? In 2017?

Question 52

Samuel,head of household with two dependents,has 2016 wages of $26,000,paid alimony of $3,000,has taxable interest income of $2,000,and a $12,000 0%/15%/20% net long-term capital gain.Samuel uses the standard deduction and is age 38.What is his 2016 taxable income and the tax on the taxable income?

Question 53

Martha has both long-term and short-term 2015 capital gains and losses.The result of netting these gains and losses is a net long-term capital loss.Martha has no qualified dividend income.Also,Martha's 2015 taxable income puts her in the 28% tax bracket.Which of the following is correct?

A)Martha will use Parts I,II,and III of 2015 Form 1040 Schedule D.
B)Martha will not benefit from the special treatment for long-term capital gains.
C)Martha will have a capital loss deduction.
D)All of the above.
E)None of the above.

Question 54

Phil's father died on January 10,2016.The father had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10,2015,when the stock was worth $430,000.His father paid gift tax of $31,000.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 23,2016.What is the amount and nature of Phil's gain or loss from disposition of this property?

Question 55

In 2016,an individual taxpayer has $863,000 of taxable income that includes $48,000 of 0%/15%/20% long-term capital gain.Which of the following statements is correct?

A)All of the LTCG will be taxed at 0%.
B)All of the LTCG will be taxed at 15%.
C)All of the LTCG will be taxed at 20%.
D)Some of the LTCG will be taxed at 15% and some at 20%.
E)None of the above.

Question 56

In 2016,Mark has $18,000 short-term capital loss,$7,000 28% gain,and $6,000 0%/15%/20% gain.Which of the statements below is correct?

A)Mark has a $5,000 capital loss deduction.
B)Mark has a $3,000 capital loss deduction.
C)Mark has a $13,000 net capital gain.
D)Mark has a $5,000 net capital gain.
E)Mark has a $18,000 net capital loss.

Question 57

Sara is filing as head of household and has 2016 taxable income of $57,000 which includes $3,000 of net long-tem capital gain.The net long-term capital gain is made up of $1,000 25% gain and $2,000 0%/15%/20% gain.What is the tax on her taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.

A)$0
B)$8,548
C)$8,248
D)$8,348
E)None of the above

Question 58

Willie is the owner of vacant land that he purchased in 2012 for $1,400,000 and held for investment.On January 22,2015,he was paid $145,000 for a thirteen-month option on the land by Susan.Susan could buy the land for an additional $1,200,000 by exercising the option.Susan had hoped to build a luxury home on the land,but was unable to get approval to build a big enough home to satisfy her needs.Consequently,Susan did not exercise her option and the option expired on February 22,2016.(1)What is Willie's basis,gain or loss,and type of gain or loss from these events? (2)What is Susan's basis,gain or loss,and type of gain or loss from these events?

Question 59

Robin Corporation has ordinary income from operations of $30,000,net long-term capital gain of $10,000,and net short-term capital loss of $15,000.What is the taxable income for 2016?

A)$25,000
B)$27,000
C)$28,500
D)$30,000
E)None of the above

Question 60

Violet,Inc. ,has a 2016 $80,000 long-term capital gain included in its $285,000 taxable income.Which of the following is correct?

A)Violet will benefit from an alternative tax on net capital gains computation.
B)Violet's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach.
C)Violet's $80,000 net capital gain is not taxable.
D)Violet's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach.
E)None of the above.

Question 61

Harold is a head of household,has $27,000 of taxable income in 2016 from non-capital gain or loss sources,and has the following capital gains and losses:
28% long-term capital gain
$ 4,300
28% long-term capital loss
(2,000)
0%/15%/20% long-term capital gain
19,000
Short-term capital loss
(1,700)
​
Ignore standard deductions and exemptions.What is Harold's taxable income and the tax on that taxable income?

Question 62

When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

Question 63

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 the dolls.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 and sells them.Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket.What issues do these facts create?

Question 64

In 2012,Harold purchased a classic car that he planned to restore for $12,000.However,Harold is too busy to work on the car and he gives it to his daughter Julia in 2016.At this time,the fair market value of the car has declined to $10,000.Harold paid no gift tax on the transaction.Julia completes some of the restoration herself with out-of-pocket costs of $5,000.She later sells the car for $30,000.What is Julia's recognized gain or loss on the sale of the car?

A)$0
B)$13,000
C)$15,000
D)$18,000
E)None of the above

Question 65

Martha is unmarried with one dependent and files as head of household.She had 2016 taxable income of $45,000 which included $16,000 of 0%/15%/20% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?

Question 66

Hilda lent $2,000 to a close personal friend to help the friend avoid overdrawing the friend's checking account.The friend was supposed to repay the $2,000 within a month.Instead,the friend declared personal bankruptcy and Hilda will never recover any of the $2,000.What are the tax implications of these events for Hilda?

Question 67

The chart below details Sheen's 2014,2015,and 2016 stock transactions.What is the capital loss carryover to 2016 and what is the net capital gain or loss for 2016?
Tax Year
Short-term
Capital Gains
Short-term
Capital Losses
Long-term
Capital Gains
Long-term
Capital Losses
2014
$ 4,000
$ 6,000
$ 2,000
$13,000
2015
$16,000
$14,000
$23,000
$28,000
2016
$55,000
$52,000
$67,000
$33,000

Question 68

"Collectibles" 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 car had been held for several years and $30,000 was originally paid for it.Explain why the car is or is not a collectible.

Question 69

Jambo invented a new flexible cover for a popular brand of cellphone,but did not have the finances to begin production of the cover.Instead,he sold all his rights to the invention (after patenting it)for $450,000 plus $.10 for each cover sold by the company that purchased the patent.Jambo had a zero tax basis for the invention.What is the character of his gain from disposition of the patent?

Question 70

Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs,but occasionally bills a customer with payment expected within 30 days.At the end of the year he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above)of $55,000.He also had $3,500 interest income,$200 gambling winnings,and sold corporate stock for $7,000.The stock had been purchased in 2012 for $8,200.Mike is single,has no dependents,and claims the standard deduction.What is his 2016 taxable income? (Ignore the self-employment tax deduction. )

Question 71

In early 2015,Wanda paid $33,000 for an option on a parcel of land she intended to hold as an investment.After a survey of the land (paid for by the grantor)determined that the parcel was much smaller than the grantor said it was,she let the option lapse when it expired in 2016 after 14 months.How should Wanda treat these events in 2015? 2016?

Question 72

Ranja acquires $200,000 face value corporate bonds for $186,000 when the bonds are issued.He holds the bonds as an investment for two years and then sells them for $198,000.He amortizes $2,000 of the OID.What tax issues does Ranja have with respect to these bonds?