Deck 7: Property Dispositions

Question 1

A taxpayer who disposes of his or her home in a short sale must recognize up to $1 million in cancellation of indebtedness income.

Answer 1

False

Question 2

All assets owned by a trade or business are Section 1231 assets.

Answer 2

False

Question 3

The Section 1231 look-back rules change the character of capital losses incurred in the
previous 5 years.

Answer 3

False

Question 4

Section 291 recapture only applies to a corporation.

Question 5

What are three types of dispositions other than a sale? Briefly explain each.

Question 6

A net Section 1231 gain is given the tax-favored treatment of a long-term capital asset.

Question 7

When does an asset have a substituted basis?

Question 8

Section 1245 recapture is primarily applicable to realty.

Question 9

The tax effect of a sale of an asset at a gain increases the cash flow from the sale.

Question 10

The holding period for a long-term capital asset is only one year for tax-favored treatment.

Question 11

Individuals can only deduct capital losses to the extent of capital gains plus $3,000.

Question 12

A personal residence owned by an individual is a capital asset.

Question 13

What is the difference between a realized gain or loss and a recognized gain or loss?

Question 14

In 2015,capital gains of individuals can be taxed at 0%,10%,15%,20%,25%,or 28%,excluding surtaxes.

Question 15

A mixed-use asset is an asset that is used for both personal purposes and business activities.

Question 16

The most common ordinary income assets are receivables and inventory.

Question 17

Corporate net capital gains receive no tax-favored treatment.

Question 18

The holding period for an asset acquired by inheritance is determined by including the period
the asset was held by the decedent.

Question 19

A gain must be recognized unless some tax provision allows nonrecognition or deferral.

Question 20

Gain representing depreciation recapture on equipment is taxed at ordinary income rates.

Question 21

Sheldon had salary income of $40,000.In addition,he had the following gains and losses on his property transactions: Long-term capital gain = $14,000; long-term capital loss = $6,000; short-term capital gain = $4,000; short-term capital loss = $8,000.If Sheldon has no other income items,what is his total income before any deductions for the year?

A)$44,000
B)$47,000
C)$48,000
D)$52,000

Question 22

In what order are capital gains subject to the 15%/20%,25%,and 28% capital gains included in taxable income in the determination of the tax liability?

Question 23

Donza Company has unrecaptured Section 1231 losses from the two previous years totaling $25,000 and a $32,000 Section 1231 gain in the current year.Based on this information,all of the following statements concerning Donza's taxable income for the current year are correct except:

A)Taxable ordinary income is $25,000
B)Taxable capital gain is $7,000
C)The amount taxable as ordinary income is the lesser of the unrecaptured losses or the current Section 1231 gain
D)Unrecaptured Section 1231 losses are taxable as capital gain

Question 24

What are the basic long-term capital gain tax rates and to which asset gains do they apply?

Question 25

Which of the following is correct?

A)The Section 1231 lookback rule converts potential long-term capital gain into ordinary income.
B)The Section 1231 lookback rule converts ordinary gain into ordinary loss.
C)The Section 1231 lookback rule converts casualty gain into long-term capital gain.
D)The Section 1231 lookback rule applies only to realty.

Question 26

What are the basic differences between Section 1245 and Section 1250 depreciation recapture?

Question 27

What are the carryover provisions for unused capital losses applicable to individuals?

A)Carry back 3 years and forward 5 years
B)Carry back 2 years and forward 20 years
C)Carry forward 20 years only
D)Carry forward indefinitely

Question 28

Martone Corporation sells two machines and a warehouse it has been using for storage in the current tax year.Each of the machines cost $25,000 and has an adjusted basis of $11,000 when each was sold for $14,000.The warehouse cost $105,000,has an adjusted basis of $60,000 and is sold for $95,000.All assets were depreciated using MACRS depreciation.What is the amount and type of gain recognized by Martone on the sale of these assets?

A)$6,000 Section 1245 recapture; $35,000 Section 1231 gain
B)$6,000 Section 1245 recapture; $7,000 Section 291 recapture; $28,000 Section 1231 gain
C)$6,000 section 1245 recapture; $35,000 Section 291 recapture
D)$41,000 capital gain

Question 29

Nancy sold her Section 1202 stock for $9,000,000 on August 7,2015.She had purchased the stock nine years ago for $1,500,000.She invested $4,500,000 in other qualifying Section 1202 stock.How will Nancy treat the gain on this sale for tax purposes?

Question 30

Vanessa bought 2,000 shares of Glenco stock when the company was first formed for $57,000.The company had $900,000 of total capital when formed and the stock qualified as Section 1244 stock.Vanessa sold the stock three years later for $3,000.If Vanessa is single,how much gain or loss does she have on the sale of the stock and how will it be treated by her?

Question 31

Bobsy Company has a $14,000 net Section 1231 gain for the current tax year from its only property transaction.In the previous year,it had a $7,000 net Section 1231 loss.For the current year,the net Section 1231 gain will be taxed as:

A)A $14,000 ordinary income
B)A $14,000 capital income
C)A $7,000 ordinary income and a $7,000 long-term capital gain
D)A $7,000 ordinary income and a $7,000 short-term capital gain

Question 32

Why is the character of a gain or loss on a disposition important? What are the three types of recognized gains or losses that determine their taxation?

Question 33

What is the effect of the Section 1231 look-back rules?

Question 34

Brent sold his personal car and some household furniture during the year.He had a $3,000 gain on the car but a $5,000 loss on the furniture.What is his recognized gain or loss included in taxable income as a result of these sales?

A)0
B)$2,000 loss
C)$3,000 gain
D)$5,000 loss

Question 35

George and Sally sold their primary residence in New Jersey on January 1,2013 after having lived in the home for 20 years.(They used their $500,000 exclusion to avoid recognizing their $289,000 gain on the sale.)They decided to become permanent Florida residents and moved into the condominium they had purchased on January 2,2011 at a foreclosure auction.Unfortunately,Sally missed all of her friends and family in New Jersey and in the latter part of 2015,they put the condominium up for sale and they sold it on January 2,2016.They had purchased the condominium for only $65,000 and after putting in improvements at a cost of $21,000,they were able to sell it for $525,000.What is their realized and recognized gain on the sale of the condominium?

Question 36

What is Section 291 recapture?

Question 37

What is depreciation recapture?

Question 38

What did Congress do to close the loophole that allowed a person to exclude the gain on a primary personal residence and then later claim the exclusion on a vacation home that was owned at the same time as the primary residence?

Question 39

Cliff owned investment stock purchased three years ago for $16,000 and bonds purchased six months ago for $9,800.When he needed money recently,he sold the stock for $13,800 and the bonds for $10,100.What is the amount and type of net gain or loss that Cliff will include in computing his taxable income?

A)$2,200 long-term capital loss
B)$1,900 long-term capital gain
C)$1,900 long-term capital loss
D)$300 short-term capital gain

Question 40

How are individual and corporate net capital losses treated?

Question 41

Which of the following comparisons is correct?

A)Both individual and corporate long-term capital losses carryover as short-term capital losses.
B)Individuals may only carry forward capital losses for five years; corporations may carry forward capital losses indefinitely;
C)Both individuals and corporations may use the 15% tax rate on net capital gains.
D)Corporations may carry back capital losses; individuals may not.

Question 42

Melody works in her home using a computer she purchased two years ago for $2,500.The total adjusted basis for the computer is now $1,000.Her husband and children used the computer 20 percent of the time to play computer games and for personal correspondence.She sells the computer for $1,200.How much and what kind of gain does Melody recognize?

A)$200 capital gain
B)$200 Section 1245 recapture
C)$200 Section 1231gain
D)$460 Section 1245 recapture

Question 43

On January 4,2015,Courtney gave his son,Brian,stock valued at $10,000 that he had purchased three years earlier for $16,000.Later in the year,Brian sold the stock for $11,000.What is the amount and type of gain or loss that Brian will report on this sale?

A)$1,000 short-term capital loss
B)$1,000 short-term capital gain
C)$1,000 long-term capital gain
D)No gain or loss

Question 44

Which of the following is not a requirement for the stock of a corporation to be considered Section 1244 stock?

A)The stock must be voting stock
B)The corporation must qualify as a small business corporation
C)The corporation must be a domestic corporation
D)The stock must be issued for money or property

Question 45

Margo purchased 2,000 share of qualifying Section 1202 stock six years ago for $200,000.In the current year,she sold the stock for $2,000,000.How much gain can she exclude from her income?

A)$2,000,000
B)$1,800,000
C)$900,000
D)$200,000

Question 46

William purchased his personal residence in 2008 for $285,000.In 2014,he lost his job and was unable to make payments on the mortgage after June,2014.In 2015,William worked out a new repayment schedule with his bank after he obtained a new job that reduced his mortgage from $235,000 to $120,000.Which of the following statements is true regarding this mortgage reduction?

A)William was required to include the debt in income because he continued to own the home.
B)William has to include any forgiveness of debt income only if he sells the house for more than $285,000.
C)The basis of the home for any future sale is $120,000.
D)The basis of the home on any future sale is $170,000.

Question 47

Marvin sold his sister,Sue,some stock for $20,000 purchased two years ago for $25,000.Nine months later,Sue sold the stock for $27,000.How much gain does Sue recognize on the sale?

A)$7,000
B)$3,000
C)$2,000
D)0

Question 48

Edna had $20,000 of ordinary income.In addition,she had a $1,500 short-term capital gain on one stock and a $4,900 long-term capital loss on another.What is her adjusted gross income?

A)$21,500
B)$17,000
C)$16,600
D)$15,100

Question 49

Tina is single and one of the founding shareholders of Exacta Corporation.She acquired her Exacta Section 1244 stock four years ago for $123,000.During the current year,Tina sold all of her Exacta stock to an unrelated party for $40,000.Tina had no other capital gains or losses during the year.What is the maximum amount of loss Tina can deduct in the current year for the Exacta stock?

A)$83,000
B)$53,000
C)$50,000
D)$3,000

Question 50

Shawn,a single taxpayer,sold the house he lived in for seven years for $700,000.He purchased the house for $285,000.He made improvements at a cost of $125,000 and paid a $30,000 commission on the sale.What are Shawn's realized and recognized gains on the sale?

A)$260,000 realized and recognized
B)$290,000 realized and recognized
C)$260,000 realized and $10,000 recognized
D)$260,000 realized and no gain recognized

Question 51

Which of the following is a capital asset?

A)Accounts receivable of a business
B)Personal auto
C)Land used as a movie theater parking lot
D)Business office furniture

Question 52

Becky bought a home with her husband,Ken,in 2001 for $125,000.They were divorced in 2010 and Becky became sole owner of the home under the divorce decree.On January 5,2014,Becky married Michael.Michael and Becky have been living in the house since their marriage but they are planning now to move.If Michael and Becky sell their home on December 15,2015 for $500,000,how much taxable gain must they report on their 2015 joint tax return?

A)zero
B)$125,000
C)$250,000
D)$375,000

Question 53

Which of the following statements concerning the exclusion available under Section 121 for the sale of a personal residence is correct?

A)This provision allows 50% of the gain from sale of any residence to be excluded from income.
B)A vacation home used as a residence for at least five months of the year will qualify for this exclusion.
C)It is possible for taxpayers to sell their home and qualify for this exclusion every two years.
D)The gain on the sale can be deferred and rolled over into another residence instead of electing the exclusion.

Question 54

Jason sells a piece of equipment for $43,000.The equipment was purchased four years ago for $56,000.It was depreciated using an accelerated method of depreciation.Its adjusted basis at the time of sale is $21,000.Straight-line depreciation would have been only $20,000.What is the amount and type of gain Jordan recognizes on this sale?

A)$22,000 Section 1231 gain
B)$22,000 Section 1245 gain
C)$22,000 capital gain
D)$1,000 Section 1250; $21,000 Section 1231 gain

Question 55

Carol used her auto 60 percent for business and 40 percent for personal use.She purchased it for $10,800 and has taken $3,992 of depreciation on it.What is her recognized gain on a sale for $7,800 and what is it character?

A)$6,808 Section 1231 gain
B)$3,808 Section 1245 recapture
C)$2,192 Section 1245 recapture
D)$992 Section 1231 gain

Question 56

Alpha Corporation had income from operations of $30,000.What is the corporation's taxable income including the following property transactions: Gain on investment stock held for two years = $8,000; loss on machinery held three years = $6,000; $4,000 loss on equipment held 10 months; $4,000 gain on land used for six years for storage of trucks.

A)$25,000
B)$27,000
C)$30,000
D)$32,000

Question 57

During the current tax year,the Jeckel Company has the following gains and losses from property transactions: $12,000 Section 1231 gain
$23,000 long-term capital gain
$21,000 Section 1231 loss
$4,000 Section 1231 gain
What is the amount and type of gain or loss reported by Jeckel for the year?

A)$21,000 Section 1231 loss; $39,000 capital gain
B)$16,000 Section 1231 gain; $21,000 Section 1231 loss; $23,000 capital gain
C)$18,000 net capital loss
D)$5,000 net Section 1231 loss; $23,000 capital gain

Question 58

Coley Corporation has an $800 net short-term capital loss and a $6,000 net long-term capital gain in the current year.It also has an $8,000 long-term capital loss carryover from the prior year.What is Coley's capital loss carryover to the next year?

A)$0
B)$2,000
C)$2,800
D)$8,800

Question 59

Bennett,who is single,owns all of the outstanding stock of Bennett Company.In 2015 Bennett sells all of his stock in the company for $30,000.If the stock qualifies as Section 1244 and his basis in the stock is $140,000,how is his loss on the sale classified for tax purposes?

A)$110,000 capital loss
B)$110,000 ordinary loss
C)$60,000 capital loss; $50,000 ordinary loss
D)$100,000 ordinary loss; $10,000 capital loss
E)None of the above

Question 60

An individual taxpayer has the following property transactions during the current year: Personal automobile owned 3 years $4,000 loss on sale
Business equipment owned 3 years $5,600 gain on sale
Factoring of receivables $6,200 loss
Common stock owned 7 months $3,500 gain on sale
How do these transactions affect the individual's AGI?

A)AGI is increased by $2,900
B)AGI is decreased by $1,100
C)AGI is increased by $9,100
D)AGI is decreased by $2,900

Question 61

Kelly,a single individual,has $15,000 of taxable income before a long-term capital gain of $5,000 on the sale of some stock owned for two years that she sold in 2015.What is the tax rate applied to this gain?

A)0 percent
B)10 percent
C)15 percent
D)20 percent

Question 62

Wally (who is in the 25 percent tax bracket)has a $5,000 short-term capital loss on some bonds,a $6,000 long-term capital loss on collectibles,a $15,000 Section 1202 gain,and a net $4,000 long-term capital gain from an investment.What is amount and type of gain(s)and tax rate(s)applied?

A)$8,000 gain at 28%
B)$8,000 long-term capital gain at 15%
C)$4,000 gain at 28%; $4,000 long-term capital gain at 15%
D)$4,000 gain at 25%; $4,000 long-term capital gain at 15%

Question 63

Abby has a $10,000 loss on some collectibles,a $5,000 Sec.1202 gain,and an $11,000 gain on some securities.If all gains and losses are long-term and Abby is in the 25 percent tax bracket,how is her net gain taxed?

A)$5,000 at 25%; $1,000 at 15%
B)$6,000 at 15%
C)$5,000 at 28%; $1,000 at 15%
D)$6,000 at 28%