ACCY 171 CH 11

Sandy sold 2 acres of land to her daughter, Tara. Sandy's basis in the land was $800 and she sold the land for $500. Sandy's recognized loss on the sale is $

$0

If a Section 1250 asset is sold by an individual taxpayer at a gain of $14,000 and has accumulated depreciation of $8,000 using the straight-line method, $___ of the gain will be recaptured as ordinary income. If a Section 1245 asset is sold at a gain of $14,000 and has accumulated depreciation of $8,000, $__ will be recaptured as ordinary income.

$0 $8,000

Cindy's Ceramics engaged in a like-kind exchange that resulted in a $3,000 realized gain. In addition to the like-kind property received in the transaction, Cindy also received $1,000 cash. Cindy will have to recognize $___ of her realized gain.

$1,000

Zeke's Zipline Adventures sold 6 acres of land used in the business. The sales price was $12,000 and the adjusted basis of the land was $9,000. Zeke received $4,000 at the time of sale and will receive the remaining $8,000 early next year. How much gain will Zeke recognize in the current year?

$1,000 Reason: 3,000/12,000 = 25%; $4,000 x .25 = $1,000

Zack received a gift of stock from his uncle on June 20 of the current year. Zack's uncle had a basis in the stock of $4,000, but the fair market value of the stock on June 20 was only $1,500. Zack held the stock for three months and then sold it for $1,200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?

$1,500 Reason: Since the fair market value of the gift was lower than the donor's basis at the time of the gift, the property has a dual basis. It was sold for less than the market value at the date of the gift ($1,500), so Zack will use $1,500 as his basis.

Zack received a gift of stock from his uncle on June 20 of the current year. Zack's uncle had a basis in the stock of $4,000, but the fair market value of the stock on June 20 was only $1,500. Zack held the stock for three months and then sold it for $1,200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?

$1,500 Reason: Since the fair market value of the gift was lower than the donor's basis at the time of the gift, the property has a dual basis. It was sold for less than the market value at the date of the gift ($1,500), so Zack will use $1,500 as his basis.

Will's Whitewater Rafting sold 3 acres of land used in the business. The sales price was $6,000 and the adjusted basis of the land was $4,200. Will receives a down payment of $4,000 at the time of sale and will receive the remaining $2,000 early next year. The realized gain on the sale is $___. Will's recognized gain is $___ for the current year and $___ for next year.

$1,800 $1,200 $600

Julie transferred a building with an adjusted basis of $240,000 for another building with a fair market value of $350,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $___ . The recognized gain on the exchange was $___ . Julie's adjusted basis in the building received is $___.

$110,000 $0 $240,000

Lester sold a warehouse with an original cost of $150,000 for $230,000. The warehouse had accumulated depreciation of $40,000. The recognized gain on the sale was $___ . The amount of the gain that is unrecaptured Section 1250 gain is $___ and will be taxed at a maximum rate of ___ percent. The remaining $___will be taxed at a maximum rate of 20%.

$120,000 $40,000 25% $80,000

Landshark, Inc. sold a warehouse with an original cost of $150,000 for $230,000. The warehouse had accumulated depreciation of $40,000. The recognized gain on the sale was $___. Due to Section 291 depreciation recapture, $__ will be taxed as ordinary income and $__will be Section 1231 gain.

$120,000 $8,000 $112,000

Julie transferred a building with an adjusted basis of $240,000 for another building with a fair market value of $350,000 and $25,000 in cash. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $___. The recognized gain on the exchange was $___. Julie's adjusted basis in the building received is $___.

$135,000 $25,000 $240,000

Troy received a gift of 100 shares of stock from his grandmother on July 1 of the current year. Troy's grandmother had owned the stock for fifteen years and had a basis of $14 per share. On July 1, the date of the gift, the stock was selling for $39 per share. What is Troy's basis in the stock?

$14 per share Reason: Since the fair market value of the stock is higher than the grandmother's basis, Troy will receive the stock at the donor's basis.

Carly's Classic Limo Service sold one of its automobiles for $19,000. The car was an antique car that Carly used to promote the business. The car had an original cost of $13,000 with $11,000 in accumulated depreciation. The recognized gain on the sale was $___.Carly will recognize ordinary income due to depreciation recapture of $___ and Section 1231 gain of $___.

$17,000 $11,000 $6,000

Tim's Taxi Service sold one of its cabs for $9,000. The cab had an original cost of $23,000 with $16,000 in accumulated depreciation. Assuming this is the only asset sold during the year, what is the recognized gain or loss and character of the gain or loss on this sale?

$2,000-ordinary income Reason: $9,000 - ($23,000-$16,000) = $9,000 - $7,000 = $2,000; since accumulated depreciation is more than the recognized gain, it is subject to depreciation recapture and taxed as ordinary income

Mario transferred real estate with an adjusted basis of $140,000 for similar real estate with a fair market value of $160,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $__ . The recognized gain on the exchange was $__. Mario's adjusted basis in the real estate received is $__.

$20,000 $0 $140,000

Mario transferred a building with an adjusted basis of $140,000 for a similar building with a fair market value of $100,000 and cash of $60,000. The exchange qualified as a like-kind exchange. The realized gain on the exchange was $___. The recognized gain on the exchange was $___. Mario's adjusted basis in the building received is $__.

$20,000 $20,000 $100,000

Cindy's Ceramics engaged in a like-kind exchange that resulted in a $3,000 gain. In addition to the like-kind property received in the transaction, Cindy also received $5,000 cash. Cindy will have to recognize $___of her realized gain.

$3,000

Joe's Jalopies sold one of its warehouses for $300,000 cash plus a tractor with a fair market value of $25,000. The building had a mortgage against it for $50,000 that was assumed by the buyer and an adjusted basis of $130,000. Joe's had to pay $20,000 in sales commissions to the Realtor who coordinated the sale. What is the amount realized by Joe's Jalopies?

$355,000 Reason: $300,000+$25,000+$50,000 -$20,000 = $355,000

Zack received a gift of stock from his uncle two years ago. Zack's uncle had a basis in the stock of $4,000, but the fair market value of the stock on the date it was given to Zack was only $1,500. Zack held the stock until this year and just sold it for $4,200. What basis in the stock will Zack use to determine his gain or loss on the sale of the stock?

$4,000 Reason: Since the fair market value of the gift was lower than the donor's basis at the time of the gift, the property has a dual basis. It was sold for more than the higher of the two amounts ($4,000), so Zack will use $4,000 as his basis.

Lester sold a warehouse and a forklift. The warehouse sold for $230,000. It had an original cost of $150,000 and accumulated depreciation of $40,000. The forklift sold for $4,000. It had an original cost of $15,000 and accumulated depreciation of $14,000. Lester has $2,000 in unrecaptured Section 1231 losses from last year and a marginal tax rate of 32%. Assuming no other asset sales, Lester will be taxed on $

$5,000 $40,000 $78,000

Christian received a gift from his aunt on January 4 of the current year. His aunt had a basis of $9,000 in the item. At the date of the gift, the item had a fair market value of $13,000. Christian's basis in the item is $____

$9,000

Put the process of netting Section 1231 gains and losses in order.

1.) Apply the depreciation recapture and 1239 rules to 1231 assets sold at a gain. 2.) Combine 1231 gains and losses. 3.) Treat a 1231 net loss as ordinary and apply the 1231 look back rule to a net gain.

Depreciable assets and land used in a trade or business (including rental property) held by a taxpayer for more than one year are referred to as Section ___ assets

1231

Land used in a trade or business is categorized as a pure Section____ asset. Personal property used in a trade or business is categorized as Section ___ assets and depreciable real property used in a trade or business is categorized as Section ____ assets.

1231 1245 1250

Match the preferential rate for individual taxpayers with the type of asset subject to that particular rate.

15% --> Net capital gains on assets held more than one year 25%--> Unrecaptured Sec. 1250 gains 28%--> Net gains on collectibles held more than one year

The Section 1231 look-back rule indicates that when a taxpayer recognizes a net Section 1231 gain for a year, the taxpayer must look-back to the ___ -year period preceding the current year to determine if there are any unrecaptured Section 1231 losses. If there are losses, the Section 1231 gain in the current year must be recharacterized as ___ ___to the extent of the unrecaptured loss.

5 ordinary income

Nicole inherited several acres of land upon the death of her grandmother. Nicole's grandmother had owned the land for 20 years and had a basis in the property of $8,000. At the date of death, the land was valued at $38,000. Nicole sold the property eight months after receiving it from the estate. What is the amount of Nicole's basis in the land and her holding period?

Basis = $38,000; Long-term holding period Reason: Inherited property is deemed to have a long-term holding period. The basis of inherited property is generally the fair market value at the date of death.

Mandy inherited stock upon the death of her uncle. Mandy's uncle had only owned the stock for 6 months before he died. He had a basis of $6,000 in the stock. At the date of death, the stock was valued at $6,800. Mandy sold the property three months after receiving it from the estate. What is the amount of Mandy's basis in the stock and her holding period?

Basis = $6,800; Long-term holding period Reason: Inherited property is deemed to have a long-term holding period. The basis of inherited property is generally the fair market value at the date of death.

Why is the treatment of Section 1231 gains and losses for individual taxpayers more advantageous than the treatment of gains and losses from other assets?

Because the gains receive preferential tax rates, while the losses are fully deductible rather than restricted

Which of the following statements is correct concerning the property involved in a like-kind exchange?

Both the property transferred and the property received must be used in a trade or business or held for investment.

Which of the following choices describes the tax treatment of capital losses as they apply to individuals?

Can be used to fully offset capital gains May annually deduct up to $3,000 of net capital losses against ordinary income Losses carried forward indefinitely, but not carried back

Assets that are held for investment, used in the production of income (in a venture that does not rise to the level of a trade or business), or used personally by a taxpayer are referred to as ____ assets.

Capital

Which of the following assets is NOT considered to be an ordinary asset?

Corporate stock in taxpayer's investment portfolio

Mindy's Marble Shop has a net Section 1231 gain in the current year of $18,000. In the previous five years, there are $13,000 in unrecaptured Section 1231 losses. How will Mindy's gain be taxed in the current year?

Due to the unrecaptured losses, $13,000 will be recharacterized as ordinary income, and $5,000 will be characterized as long-term capital gain. Reason: The entire gain of $18,000 must be recognized. The $13,000 unrecaptured loss does not offset the gain Rather, it recharacterizes the gain so that $13,000 is ordinary income and the remaining $5,000 is capital gain..

The exchange of personal use real estate property will qualify as a like-kind exchange if the property received will be used in a similar manner as the property transferred.

False Reason: The property transferred and received must be used in a trade or business or held for investment. Personal use property does not qualify.

Depreciation recapture changes the character of the gain or loss on a Section 1231 asset from capital to ordinary.

False Reason: Depreciation recapture applies to gains, but does not apply to losses.

Which of the following statements is INCORRECT when referring to installment sales?

If there is a loss on an installment sale, the loss is recognized pro rata as the seller receives the installment payments.

How does the reporting of gains and losses differ between (1) selling property for cash and (2) exchanging property for like-kind property?

In a like-kind exchange, the gain/loss is deferred. In a cash transaction, the gain/loss is recognized immediately.

Which of the following types of property are INELIGIBLE for like-kind treatment?

Inventory held for resale Stocks and bonds held for investment Equipment used in a trade or business Partnership interests Land held outside the U.S.

Which of the following assets is NOT considered to be a capital asset?

Inventory in taxpayer's business

Which of the following are NOT types of Section 1231 assets?

Investment property held more than one year Personal use property held more than one year

Of all Section 1231 assets used in a trade or business, only ___ is a pure Section 1231 asset because it is not a(n) __ asset.

Land depreciable

Which of the following assets are classified as Section 1231 assets?

Land held more than a year that is used in a trade or business A machine held more than a year that is used in a trade or business Apartment buildings held more than a year

Why is land considered to be a pure Section 1231 asset?

Land is not subject to depreciation.

How is the amount realized on an asset disposition calculated?

Minus seller's expenses Plus cash received Plus buyer's assumption of liabilities Plus FMV of other property received

How are net Section 1231 gains and losses treated for tax purposes?

Net gains are treated as long-term capital gains and net losses are treated as ordinary losses

When an individual taxpayer sells a Section 1250 asset at a gain, how much of the gain will be taxed as ordinary income?

None of the gain will be taxed as ordinary income.

Match the character of the asset with its use and holding period.

Ordinary --> Asset used in trade or business, held one year or less Sec. 1231 --> Asset used in trade or business held more than one year Short-term Capital--> Asset held for investment or used personally, held one year or less Long-term Capital --> Asset held for investment or used personally, held more than one year

Match the tax treatment of the gain or loss with the character of the asset.

Ordinary gain --> Taxed at regular, marginal rates Ordinary loss --> Fully deductible against all types of income Capital gain --> May be taxed at favorable (less than marginal) rates Capital loss --> Deductibility is subject to certain restrictions against certain types of income

Match the type of business property to the category in which it belongs.

Pure 1231 --> Land 1245 --> Personal property 1250 --> Depreciable real property

Which of the following choices BEST describes the process of netting Section 1231 gains and losses?

Recharacterize all or part of the gain as ordinary income as deemed by Sec. 1245, 291, or 1239. Then combine remaining 1231 gains and losses.

Which of the following statements is correct regarding gains and losses?

Recognized gains always increase a taxpayer's gross (taxable) income.

Which one of the following statements is INCORRECT regarding the treatment of gains and losses?

Short-term capital gains are generally taxed at preferential (lower) rates.

When an individual taxpayer sells depreciable real property used in a business for an amount that exceeds its original cost/original basis, how is the gain taxed?

The gain due to accumulated depreciation is taxed at a max rate of 25%. The remaining gain is taxed at 0/15/20%, depending on the taxpayer's income.

When a gain results from the sale of Section 1245 property, how does the taxpayer determine the amount that should be taxed as ordinary income?

The lesser of the recognized gain or the accumulated depreciation on the asset is ordinary income.

When boot is received in an otherwise like-kind exchange, what is the effect on a realized gain?

The taxpayer's recognized gain will be the lesser of the realized gain or the boot received.

Inventory held for resale and most financial instruments, such as stocks and bonds, are ineligible for like-kind treatment.

True Reason: These assets are not eligible for like-kind treatment even if they are similar assets.

Section 291 depreciation recapture for corporations provides that what portion of the gain on depreciable real property will be recognized as ordinary income?

Twenty percent of the lesser of the recognized gain or the accumulated depreciation

The recapture of depreciation changes the character of the gain on a Section 1231 asset from a(n)___ gain to ___ income.

capital ordinary

The amount of gain on an installment sale recognized each year is calculated by multiplying the ___ ___ ___ by the installment payment received.

gross profit percentage

The amount of Section 1245 depreciation recapture that will be taxed as ordinary income is the ___ of (1) the recognized gain on the sale or (2) total accumulated depreciation on the asset. The remainder of any gain is characterized as Section ___ gain, which may be taxed atcapital gain rates.

lesser 1231

A(n) ____ -____ ___results in taxpayers being able to trade assets and defer the recognition of the gain or loss to a future period in a subsequent transaction.

like-kind exchange

If a taxpayer sells property to a related party, any ___resulting from the transaction is NOT recognized for tax purposes.

loss

Assets that are created or used in a taxpayer's trade or business or that have been in service for one year or less are referred to as___assets.

ordinary

The ___ gain or loss on a property disposition is the amount that increases or decreases a taxpayer's gross income.

recognized