ACCT512 Final Exam
Which of the following exchanges qualify as like-kind exchanges under Sec. 1031?
A motel in Texas for a motel in Italy No An office building held for investment for an airplane to be used in the taxpayer's business No Land held for investment for marketable securities held for investment No Land held for investment for a farm to be used in the taxpayer's business Yes
When must a taxpayer who gives boot recognize a gain or loss?
A taxpayer who gives boot will recognize a gain if the FMV of the boot is greater than the basis of the boot. A loss is recognized if the FMV of the boot (assuming the boot is not personal-use property) is less than the basis of the boot.
Which of the following exchanges qualify as like-kind exchanges under Sec. 1031?
Acme Corporation stock held for investment purposes for Mesa Corporation stock also held for investment purposes No A motel used in a trade or business for an apartment complex held for investment Yes A pecan orchard in Texas used in a trade or business for an orange grove in Florida used in a trade or business Yes A one-third interest in a general partnership for a one-fourth interest in a limited partnership No Inventory for equipment used in a trade or business No Unimproved land held as an investment for a warehouse used in a trade or business Yes An automobile used as a personal-use asset for marketable securities held for investment No
What is the justification for Sec. 1033, which allows a taxpayer to elect to defer a gain resulting from an involuntary conversion? May a taxpayer elect under Sec. 1033 to defer recognition of a loss resulting from an involuntary conversion?
An involuntary conversion is beyond the control of the taxpayer. Since the property is replaced, the taxpayer maintains a continuing investment and may lack the wherewithal to pay a tax on the gain. Section 1033 applies only to the nonrecognition of gain.
All assets listed below have been held for more than one year. Requirement Which assets might be classified as Sec. 1231, Sec. 1245, or Sec. 1250 property? An asset may be classified as more than one type of property.
Asset Sec. 1231 a. Land on which a factory is located Yes b. Equipment used in the factory Yes c. Raw materials inventory No d. Patent purchased to allow use of a manufacturing process Yes e. Land held primaily for sale No f. Factory building acquired in 1986 (the straight-line ACRS recovery method is used) Yes
All assets listed below have been held for more than one year. Requirement Which assets might be classified as Sec. 1231, Sec. 1245, or Sec. 1250 property? An asset may be classified as more than one type of property.
Asset Sec. 1245 a. Land on which a factory is located No b. Equipment used in the factory Yes c. Raw materials inventory No d. Patent purchased to allow use of a manufacturing process Yes e. Land held primaily for sale No f. Factory building acquired in 1986 (the straight-line ACRS recovery method is used) No
All assets listed below have been held for more than one year. Requirement Which assets might be classified as Sec. 1231, Sec. 1245, or Sec. 1250 property? An asset may be classified as more than one type of property.
Asset Sec. 1250 a. Land on which a factory is located No b. Equipment used in the factory No c. Raw materials inventory No d. Patent purchased to allow use of a manufacturing process No e. Land held primaily for sale No f. Factory building acquired in 1986 (the straight-line ACRS recovery method is used) Yes
Debbie owns a building with a basis of $300,000 and a holding period starting on May 10, 2008. Debbie exchanges the building for a building owned by Doug on July23, 2020. Doug's building has an FMV of $500,000. Both Debbie and Doug use the building in their businesses. What is Debbie's basis for the building received in the exchange and when does the holding period start for that building?
Debbie's basis for the building received in the exchange is $300,000 The holding period starts on May 10, 2008
Why is it unlikely that gains due to the sale of equipment will be treated as Sec. 1231 gains?
Equipment is Sec. 1245 property and gain to the extent of total depreciation is ordinary income but limited to the amount of realized gain. Generally, the amount of depreciation is greater than the gain realized. Taxpayers must sell the equipment for more than the original basis to have any of the gain treated as Sec. 1231 gain.
Explain how the gain on the sale or exchange of land could be classified as either ordinary income, a Sec. 1231 gain, or a LTCG, depending on the facts and circumstances.
Gain on the sale or exchange of land held as inventory is ordinary while the gain is a Sec. 1231 gain if the land is used in a trade or business and held more than one year. If the land is used in a trade or business and held for one year or less, the gain is ordinary. If the land is held as an investment or for personal use, the gain is LTCG if held more than one year.
Explain how the gain from an involuntary conversion of business property held more than one year is taxed if the involuntary conversion is the result of a condemnation. Explain the tax treatment if the involuntary conversion is due to a casualty.
Gains and losses due to the condemnation of business assets held more than one year are classified as Sec. 1231 gains and losses. Gains and losses due to casualties or thefts of business assets held more than one year are combined with gains and losses due to casualties or thefts of nonpersonal use capital assets held more than one year. If the result is a net gain, the gains and losses are treated as Sec. 1231 gains and losses. If the result is a net loss, the gains and losses are ordinary.
Lanny wants to purchase a farm owned by Jane, but Jane does not want to recognize a gain on the transfer of the appreciated property. Explain how a three-party exchange might be used to allow Lanny to obtain the farm without Jane having to recognize a gain.
If Jane identifies like-kind property that she would like to own, Lanny could purchase the property and then exchange the property for Jane's farm. The exchange is a like-kind exchange for Jane and she does not recognize gain.
What are severance damages? What is the tax treatment for severance damages received if the taxpayer does not use the severance damages to restore the retained property?
If a portion of the taxpayer's property is condemned, the value of retained property may decline. Severance damages are amounts received because of the decline in value. Amounts received as severance damages reduce the basis of the retained property and any amount received in excess of basis is treated as gain.
Herald sells equipment used in a trade or business for $24,200. The equipment costs $28,200 and has an adjusted basis of $25,700. Why is it important to know the holding period?
If the holding period is one year or less, the $1,500 loss is ordinary. If the holding period is more than one year, the loss is a Sec. 1231 loss that may offset other Sec. 1231 gains.
in what situations may a gain due to an involuntary conversion of real property be deferred if like-kind property is purchased to replace the converted property?
If the real property is held for productive use in a trade or business or for investment and is condemned, a proper replacement may be made by acquiring like-kind property.
John and Karen are unrelated individuals. John sold land that is Sec. 1231 property held for three years and recognized a $50,000 gain. Karen sold a building that is Sec. 1231 property held for three years and recognized a $50,000 gain. Straight-line depreciation was used. John and Karen both have a 32% tax rate, no other transactions involving capital assets or 1231 assets, and no nonrecaptured Sec. 1231 losses. Except for the sales of different assets, their tax situation is exactly the same. As a result of selling his Sec. 1231 property, will John pay more, less or the same amount of taxes than Karen as a result of selling her Sec. 1231 property? Explain.
John will pay less than what Karen will pay because some or all of Karen's Sec. 1231 gain is unrecaptured Sec. 1250 gain that will be taxed at 25%, and John will pay 15% on the gain from the sale of land.
Mr. and Mrs. Snellown and live in a house, with an adjusted basis of $300,000,that was purchased in 1996. The house is destroyed by a tornado on March 10 of the current year, and the Snells receive insurance proceeds of $410,000. They purchase another residence for $480,000 four months later.
May they exclude the $110,000 gain, and if so, what is the basis of the residence purchased in July? Yes, they may exclude the gain under Sec. 121.
When is a net Sec. 1231 gain treated as ordinary income?
Net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the five most recent preceding years.
Does the receipt of boot in a transaction that otherwise qualifies as a like-kind exchange always cause the exchange to be at least partially taxable?
No. The receipt of boot will not cause a realized loss to be recognized.
Must property be actually condemned for the conversion of property to be classified as an involuntary conversion? Ex
No. The threat or eminence of requisition or condemnation of property may cause an involuntary conversion.
Consider three office buildings placed in service as shown below and answer the following true-false questions. Assume all assets are sold by a noncorporate taxpayer at a gain and there are no other sales or exchanges or nonrecaptured Sec. 1231 loss unless told otherwise. None of the buildings are fully depreciated when sold and the taxpayer's tax rate is 32% and 15% for ANCG.
Questions True/ False 1. Some or all of the gain on sale of #1 is ordinary if accelerated depreciation was used. True 2. If the straight-line method of depreciation was used for #1, some or all of the gain may be taxed at 25%. True 3. Gain on the sale of #2 could be Sec. 1245 ordinary income. True 4. Gain on the sale of #2 could be Sec. 1231 gain. True 5. Part of the gain on the sale of #2 could be Sec. 1245 ordinary income and part could be Sec. 1231 gain. True 6. If the straight-line method of depreciation was used for #2, some or all of the gain may be taxed at 25%. True
Phillip owns a building used in his business with an adjusted basis of $300,000 and a $800,000 FMV. He exchanges the building for a building owned by Derek. Derek's building has a $1,075,000 FMV but is subject to a $275,000 liability. Philip assumes Derek's liability and uses the building in his business.
Requirement a. What is Philip's realized gain? The realized gain is $500,000 Requirement b. What is Philip's recognized gain? (If there is no recognized gain, make sure to enter "0" in the appropriate cell.) The recognized gain is $0 Requirement c. What is Philip's basis for the building received? Philip's basis for the building received is $575,000
If Debbie and Doug are related taxpayers, explain what action could occur that would cause the exchange not to qualify as a like-kind exchange.
The exchange is not a like-kind exchange if either Debbie or Doug disposes of the property within two years following the date of the exchange.
Which of the following assets (assume all assets have a holding period of more than one year) do not qualify as Sec. 1231 property: inventory, a pig held for breeding, land used as a parking lot for customers, and marketable securities?
The inventory and marketable securities do not qualify as Sec. 1231 property.
When does a nonsimultaneous exchange qualify as a like-kind exchange?
The property must be identified within 45 days after the date on which the taxpayer transfers the property relinquished in the exchange and received within 180 days after the date on which the taxpayer transfers the property relinquished in the exchange (but not later than the due date for filing a return for the year in which the transfer of the relinquished property occurs).
What requirements must be satisfied by an unmarried taxpayer under Sec. 121 to be eligible for the election to exclude a gain up to $250,000 on the sale or exchange of a principal residence?
The property must be owned and used as a principal residence for at least two years during the five-year period ending on the date of sale. The exclusion applies to only one sale or exchange every two years.
Columbia Corporation owns an office building with a $250,000 adjusted basis. The building is destroyed by a tornado. The insurance company paid $700,000 as compensation for the loss. Eight months after the loss, Columbia uses the insurance proceeds and other funds to acquire a new office building for $624,000 and machinery for one of the company's plants at a $97,000 cost.
The recognized gain is $76,000 . The basis for the new office building is $250,000 . The basis for the machinery acquired is $97,000 .
The functional use test is often used to determine whether the replacement property is similar or related in service or use to the property converted. Explain the functional use test.
The replacement property must be functionally the same as the converted property.
When may a sale of real property and a subsequent purchase of real property be treated as a like-kind exchange?
The two separate transactions could be viewed as a like-kind exchange if the two transactions are interdependent.
