Deck 17: Property Transactions: Section 1231 and Recapture Provisions

Question 1

Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.

Answer 1

True

Question 2

Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill) that are eligible for amortization and held for more than one year.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Section 1245 applies to amortizable § 197 intangible assets.

Question 5

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Question 6

Once § 1231 gains are netted against § 1231 losses, if the gains exceed the losses, the net gain is offset by the
lookback nonrecaptured § 1231 losses.

Question 7

Casualty gains and losses from nonpersonal use assets are not netted against casualty gains and losses from personal use assets.

Question 8

An individual business taxpayer owns land on which he grows trees for logging.The land has been held more than 10 years and the trees growing on the land were planted eight years ago.Normally, the timber would be inventory for this taxpayer, but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.

Question 9

A net § 1231 loss is treated as an ordinary loss.

Question 10

Personal use property casualty gains and losses are not subject to the § 1231 rules.

Question 11

Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.

Question 12

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

Question 13

Section 1231 property includes nonpersonal use property whose casualty gains exceed casualty losses for the taxable year.

Question 14

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

Question 15

Nonrecaptured § 1231 losses from the six prior tax years may cause current-year net § 1231 gain to be treated as ordinary income.

Question 16

For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.

Question 17

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

Question 18

A personal use property casualty loss that occurs in a nonfederally declared disaster area is deductible only to the extent it exceeds 10% of AGI.

Question 19

Section 1231 property generally does not include artistic compositions.

Question 20

Section 1231 applies to the sale or exchange of business properties but not to personal use activity casualties.

Question 21

Red Company had an involuntary conversion on December 23, 2019.The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event, Red initially has:

A)$10,000 § 1231 loss.
B)$10,000 § 1245 recapture gain.
C)$4,200 casualty loss.
D)$4,200 § 1231 loss.
E)None of these.

Question 22

Which of the following is correct?

A)Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross income.
B)Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross income.
C)Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross income.
D)Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross income.
E)All of these.

Question 23

White Company acquires a new machine for $75,000 and uses it in White's manufacturing operations.A few months after White places the machine in service, it discovers that the machine is not suitable for White's business.White had fully expensed the machine in the year of acquisition using § 179.White sells the machine for $60,000 in the tax year after it was acquired but held the machine only for a total of 10 months.What was the tax status of the machine when it was disposed of and the amount of the gain or loss?

A)A capital asset and $60,000 gain.
B)An ordinary asset and $60,000 gain.
C)A § 1231 asset and $60,000 gain.
D)A § 1231 asset and $60,000 loss.
E)None of these.

Question 24

Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.

Question 25

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?

A)Ordinary income of $6,000.
B)A § 1231 gain of $3,000 and $3,000 of ordinary income.
C)A § 1231 gain of $6,000.
D)A § 1231 gain of $6,000 and $3,000 of ordinary income.
E)None of these.

Question 26

During 2019, an individual had the following gains and losses on property held for the long-term holding period: sale of Orange common stock ($8,000 gain); sale of real property used in the taxpayer's business ($1,800 loss); destruction of real property used in the taxpayer's business by fire ($1,000 loss).Which of the following statements is correct?

A)The fire loss would reduce the real property sale loss.
B)The fire loss would reduce the stock sale gain.
C)The sale of real property loss would be netted against the stock sale gain.
D)The sale of real property is a § 1231 loss.
E)None of these.

Question 27

Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.

Question 28

Which of the following assets held by a manufacturing business is a § 1231 asset?

A)Inventory.
B)Office furniture used in the business and held less than one year.
C)A factory building used in the business and held more than one year.
D)Accounts receivable.
E)All of these.

Question 29

The maximum amount of the unrecaptured § 1250 gain (25% gain) is the depreciation taken on real property sold at a recognized gain.

Question 30

Verway, Inc., has a 2019 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2017.For 2019, Verway's net § 1231 gain is treated as:

A)$55,000 ordinary loss.
B)$55,000 ordinary gain.
C)$55,000 capital loss.
D)$55,000 capital gain.
E)None of these.

Question 31

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under
§ 170.

Question 32

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

Question 33

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

Question 34

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property employed outside the United States and that is sold at a gain.

Question 35

Vertigo, Inc., has a 2019 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2018.For 2019, Vertigo's net § 1231 loss is treated as:

A)Ordinary loss.
B)Ordinary gain.
C)Capital loss.
D)Capital gain.
E)None of these.

Question 36

Blue Company sold machinery for $45,000 on December 23, 2019.The machinery had been acquired on April 1, 2017, for $69,000 and its adjusted basis was $34,200.The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:

A)$0 § 1231 gain, $10,800 § 1245 recapture gain, $0 § 1231 loss.
B)$0 § 1231 gain, $0 § 1245 recapture gain, $14,800 § 1231 loss.
C)$0 § 1231 gain, $34,200 § 1245 recapture gain, $0 § 1231 loss.
D)$0 § 1231 gain, $10,800 § 1245 recapture gain, $34,200 § 1231 loss.
E)None of these.

Question 37

Vertical, Inc., has a 2019 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2018.For 2019, Vertical's net § 1231 gain is treated as:

A)$45,000 long-term capital gain and $22,000 ordinary loss.
B)$67,000 ordinary gain.
C)$45,000 long-term capital gain and $22,000 ordinary gain.
D)$67,000 capital gain.
E)None of these.

Question 38

The following assets in Jack's business were sold in 2018: $$\begin{array} { l l l } \text { Asset } & \underline { \text { Holding Period } } & \underline { \text { Gain/(Loss) } } \\\text { Office equipment } & 6 \text { years } & \$ 1,100 \\\text { Automobile } & 8 \text { months } & ( \$ 800 ) \\\text { ABC stock (capital asset) } & 2 \text { years } & \$ 1,400\end{array}$$ Office equipment, purchased for $8,000, had a zero adjusted basis.The automobile was purchased for $2,000 and sold for $1,200.The ABC stock was purchased for $1,800 and sold for $3,200.In 2018 (the year of sale), Jack should report what amount of net capital gain and net ordinary income?

A)$1,700 LTCG.
B)$600 LTCG and $300 ordinary gain.
C)$1,400 LTCG and $300 ordinary gain.
D)$2,500 LTCG and $800 ordinary loss.
E)None of these.

Question 39

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

Question 40

Spencer has an investment in two parcels of vacant land.Parcel 1 is a capital asset and parcel 2 is a § 1231 asset. Spencer already has a short-term capital loss for the year that he would like to offset with capital gain.He has a §
1231 lookback loss that exceeds the gain from the disposition of either land parcel.Spencer wants to sell only one land parcel: each of them would yield the same amount of gain.The gain that would be recognized exceeds the short-term capital loss Spencer already has.Which of the following statements is correct?

A)Spencer will have a net capital loss no matter which land parcel he sells.
B)Spencer will have a net capital loss if he sells parcel 2.
C)Spencer will have a net capital loss if he sells parcel 1.
D)Spencer will have a net capital gain if he sells either parcel 1 or parcel 2.
E)None of these.

Question 41

The following table describes the § 1231 assets sold by Tan Company (a sole proprietorship) this year.Compute the gain or loss from each asset disposition and determine the net § 1231 gain treated as long-term capital gain for the year.Assume that there is a § 1231 lookback loss of $14,000. $$\begin{array} { l c c c c c } \text { Asset } & \text { Acquired } & \text { Sold } & \text { Cost } & \text { Depreciation } & \text { Sale Price } \\\text { Stamping machine } & 3 / 10 / 15 & 8 / 10 / 19 & \$ 40,000 & \$ 29,736 & \$ 2,000 \\\text { Factory building } & 2 / 12 / 12 & 7 / 23 / 19 & 80,000 & 18,838 & 90,000 \\\text { Tractor } & 5 / 16 / 14 & 11 / 13 / 19 & 52,000 & 52,000 & 60,000 \\\text { Overhead crane } & 11 / 12 / 08 & 2 / 25 / 19 & 74,000 & 74,000 & 18,000\end{array}$$

Question 42

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:

A)Was depreciated by the transferor.
B)Is depreciable in the hands of the transferee.
C)Is a capital asset.
D)Is real property.
E)None of these.

Question 43

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:

A)$4,200 ordinary loss.
B)$15,800 § 1245 recapture gain.
C)$14,200 § 1245 recapture gain.
D)$30,000 § 1231 gain.
E)None of these.

Question 44

Which of the following statements is correct?

A)When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.
B)When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.
C)When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.
D)When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E)All of these are correct.

Question 45

A business machine purchased April 10, 2017, for $98,000 was fully depreciated in 2017 using § 179 immediate expensing.On August 15, 2019, the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?

Question 46

Which of the following would extinguish the § 1245 recapture potential?

A)An exchange of depreciable business equipment for like-kind business equipment with gain realized but not recognized.
B)A nontaxable incorporation under § 351.
C)A nontaxable contribution to a partnership under § 721.
D)A nontaxable reorganization.
E)None of these.

Question 47

Business equipment is purchased on March 10, 2018, used in the business until September 29, 2018, and sold at a $23,000 loss on October 10, 2018.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2018 Form 4797, Part:

A)I.
B)II.
C)III.
D)IV.
E)This transaction would not be reported in the Form 4797.

Question 48

Assume that a building is subject to § 1250 depreciation recapture because bonus depreciation [§ 168(k)] was used. The building is destroyed in a hurricane, which is the taxpayer's only casualty or theft for the year.In which of the following situations could there be a § 1250 depreciation recapture gain?

A)There is a loss because the insurance recovery is less than the adjusted basis.
B)There is a gain because the insurance recovery exceeds the adjusted basis.
C)Because of the length of time the building has been held, there is no remaining additional depreciation.
D)There is no insurance recovery and the adjusted basis of the building is greater than zero.
E)None of these.

Question 49

Which of the following events could result in § 1250 depreciation recapture?

A)Sale at a loss of a depreciable business building held more than one year.
B)Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C)Sale at a loss of a depreciable business building held for nine months.
D)Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E)None of these.

Question 50

An individual has a $40,000 § 1245 gain, a $35,000 § 1231 gain, a $33,000 § 1231 loss, a $3,000 § 1231 lookback loss, and a $15,000 long-term capital gain.The net long-term capital gain is:

A)$30,000.
B)$40,000.
C)$17,000.
D)$15,000.
E)None of these.

Question 51

A retail building used in the business of a sole proprietor is sold on March 10, 2019, for $342,000.The building was acquired in 2009 for $400,000 and straight-line depreciation of $104,000 had been taken on it.What is the maximum unrecaptured § 1250 gain from the disposition of this building?

A)$400,000
B)$322,000
C)$104,000
D)$26,000
E)None of these.

Question 52

A business taxpayer sold all the depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $22,000.What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer's adjusted gross income? (Ignore the self- employment tax deduction.) $$\begin{array} { l c c c c } \text { Asset } & \text { Purchase Date } & \text { Sale Date } & \text { Depreciation } & \text { Gain (Loss) } \\\text { Machine 1 } & 10 / 10 / 17 & 11 / 11 / 19 & \$ 323,000 & \$ 66,000 \\\text { Machine 2 } & 10 / 02 / 16 & 11 / 11 / 19 & 65,000 & ( 15,000 ) \\\text { Machine 3 } & 09 / 23 / 15 & 11 / 11 / 19 & 183,000 & 23,000 \\\text { Machine 4 } & 09 / 23 / 15 & 11 / 11 / 19 & 28,000 & 34,000\end{array}$$

Question 53

Williams owned an office building (but not the land) that was destroyed by a fire. The building was insured and he has a $156,000 gain because his insurance recovery exceeded his adjusted basis for the building. Williams may replace the building. He had taken $145,000 of depreciation on the building, has no § 1231 lookback loss, has no other § 1231 transactions for the year, and has no Schedule D transactions for the year. What is final nature of his gain for the
year and what tax rate(s) apply to the gain if:

a. He does reinvest the insurance proceeds.

b. If he does not reinvest the insurance proceeds.

Question 54

Section 1231 gain that is treated as long-term capital gain carries from the 2018 Form 4797 to the 2018 Form 1040, Schedule D, line .

A)8
B)9
C)10
D)11
E)None of these.

Question 55

Lynne owns depreciable residential rental real estate that has accumulated depreciation of $65,000 (all from straight- line) .If Lynne sold the property, she would have a $53,000 gain.The initial characterization of the gain would be:

A)Section 1245 gain.
B)Section 1231 gain.
C)Section 1250 gain.
D)Section 1239 gain.
E)None of these.

Question 56

A business taxpayer sold all depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $12,000.What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer's adjusted gross income? (Ignore the self- employment tax deduction.) $$\begin{array} { l c c c c } \text { Asset } & \text { Purchase Date } & \text { Sale Date } & \text { Depreciation } & \text { Gain (Loss) } \\\text { Machine 1 } & 10 / 10 / 17 & 11 / 11 / 19 & \$ 323,000 & \$ 66,000 \\\text { Machine 2 } & 10 / 02 / 17 & 11 / 11 / 19 & 65,000 & ( 15,000 ) \\\text { Machine 3 } & 09 / 23 / 15 & 11 / 11 / 19 & 183,000 & 23,000 \\\text { Machine 4 } & 09 / 23 / 15 & 11 / 11 / 19 & 28,000 & 64,000\end{array}$$

Question 57

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?

A)The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain.
B)The taxpayer has $12,000 net long-term capital gain.
C)The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss.
D)The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain.
E)None of these.

Question 58

Residential real estate was purchased in 2016 for $345,000, held as rental property, and depreciated straight-line.
Assume that the land cost was $45,000 and the building cost was $300,000.Depreciation totaled $34,089.The building and land were sold on June 10, 2019, for $683,000 total.What are the tax status of the property and the nature of the gain from the disposition, and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?

Question 59

Vanna owned an office building that had been held more than one year when it was sold for $567,000.The real estate had an adjusted basis of $45,000 for the land and $233,000 for the building.Straight-line depreciation of $162,000 had been taken on the building.What are the amount and initial character of the gain or loss from disposition of the real estate? Is any of the gain unrecaptured § 1250 (25%) gain?

Question 60

An individual taxpayer has the following gains and losses.There is $3,000 of § 1231 lookback losses.What is the net long-term capital gain? $$\begin{array} { l l r } \text { Holding Period/Propertv } & \begin{array} { l } \text { Character of Gain or } \\\text { Loss }\end{array} & \text { Amount } \\\text { 5 years/vacant land } & \text { §1231 gain } & \$ 7,000 \\\text { 2 years/business equipment } & \text { §1245 gain } & 3,200 \\\text { 3 years/publicly traded stock } & \text { Long-term capital gain } & 890 \\\text { 8 months/publicly traded stock } & \text { Short-term capital loss } & ( 1,870 )\end{array}$$

Question 61

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?

Question 62

Betty, a single taxpayer with no dependents, has the following gains and losses.Before considering these transactions, she has $45,000 of other taxable income.What is the treatment of the gains and losses and what is Betty's taxable income? $$\begin{array} { l r } \text { § 1245 gain \#1 } & \$ 18,000 \\\text { §1245 gain \#2 } & 5,000 \\\text { Business equipment long-term casualty loss } & ( 8,000 ) \\\text { Business real property long-term casualty gain } & 12,000 \\\text { §1231 gain } & 13,000 \\\text { §1231 lookback loss } & ( 2,000 )\end{array}$$

Question 63

In 2019 Angela, a single taxpayer with no dependents, disposed of a business building for $44,000 that cost $100,000.
Depreciation of $60,000 had been taken on the building.Angela has a short-term capital loss of $3,000 this year.She has taxable income (not related to property transactions) of $125,000 and no § 1231 lookback loss.What is the amount and nature of the gain or loss, what is Angela's taxable income, and what is her tax on the taxable income?

Question 64

Describe the circumstances in which the maximum unrecaptured § 1250 gain (25% gain) does not become part of the Schedule D netting process for an individual taxpayer?

Question 65

Depreciable personal property was sold at a gain in 2018.On what 2018 form would this transaction be reported, where initially in that form, and what will the form most likely do with the gain?

Question 66

Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.

Question 67

A business machine purchased April 10, 2018, for $62,000 was fully depreciated in 2018 using § 179 immediate expensing.On August 15, 2019, the sole proprietor who owned the machine gave it to his son.On that date, the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and sold it on November 22, 2019, for $53,000.What are the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?

Question 68

Charmine, a single taxpayer with no dependents, has already incurred a $10,000 § 1231 gain in 2019 and has no §
1231 lookback losses.She purchased a business machine for $100,000 five years ago; $70,000 of depreciation has been taken on it, and the machine is now worth $90,000.How will the net § 1231 gain or loss be affected if Charmine trades in the business machine for a like-kind business machine and pays an additional $12,000 in cash to obtain the replacement machine? If Charmine already has $352,000 of taxable income, which does not include a $10,000 § 1231 gain or any capital gains or losses, what is her taxable income?