Chapter 11
Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What is the amount and character of Hannah's recognized gain or loss on the stock?
$1,300 long-term capital gain, computed as follows: DescriptionAmountExplanation(1)Amount Realized$2,500100 shares × $25/share(2)Adjusted Basis 1,200100 shares × $12/share carryover basis from donor Gain Recognized$1,300(1) − (2) At the date of the gift the stock had appreciated in value from the time Aunt Pam purchased the stock. As a result, Aunt Pam's basis will carry over to Hannah when she receives the stock as a gift. Hannah's holding period begins on the date that Aunt Pam acquired the stock because Hannah's basis is a carryover basis. Therefore, the character of the gain is long-term capital gain.
Rafael sold an asset to Jamal. What is Rafael's amount realized on the sale in each of the following alternative scenarios? Problem 11-32 Part-b b. Rafael received $80,000 cash and was relieved of a $30,000 mortgage on the asset he sold to Jamal. Rafael also paid a commission of $5,000 on the transaction
$105,000, computed as follows: DescriptionAmountExplanation(1)Cash received$80,000 (2)Relief of debt 30,000 (3)Commissions (5,000) Amount Realized$105,000 (1) + (2) + (3)
Shasta Corporation sold a piece of land to Bill for $45,000. Shasta bought the land two years ago for $30,600. What gain or loss does Shasta realize on the transaction?
$14,400, computed as follows: DescriptionAmountExplanation(1)Amount Realized$45,000 (2)Adjusted Basis 30,600 Gain (Loss) Realized$14,400(1) − (2)
Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp., at fair market value. The fair market value of the building was determined to be $325,000; Luke built the building several years ago at a cost of $200,000. Luke had claimed $45,000 of depreciation expense on the building. The fair market value of the land was determined to be $210,000 at the time of the sale; Luke purchased the land many years ago for $130,000. Problem 11-46 Part-a a. What is the amount and character of Luke's recognized gain or loss on the building?
$170,000 ordinary income, computed as follows: DescriptionAmountExplanation(1)Amount Realized$325,000 Given(2)Original Basis 200,000 Given(3)Accumulated Depreciation (45,000)Given(4)Adjusted Basis 155,000 (2) + (3) Ordinary Gain/(Loss) Recognized under §1239*$170,000 (1) − (4)
On September 30 of last year, Rex received some investment land from Holly as a gift. Holly's adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character of Rex's recognized gain (loss) if he sells the land on May 12 this year at the following prices? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-37 Part-b b. $70,000
$20,000 long-term capital gain, computed as follows: DescriptionAmountExplanation(1)Amount Realized$70,000 (2)Adjusted Basis 50,000Rex's basis is a carryover basis from the donor Gain (Loss) Recognized$20,000(1) − (2) Rex's holding period begins on the date that Holly acquired the stock because Rex's basis is a carryover basis. Therefore, the character of the gain is long-term capital gain.
Bourne Guitars, a corporation, reported a $157,000 net §1231 gain for year 6. Problem 11-51 Part-a a. Assuming Bourne reported $50,000 of nonrecaptured net §1231 losses during years 1-5, what amount of Bourne's net §1231 gain for year 6, if any, is treated as ordinary income?
$50,000 of Bourne's gain would be ordinary income and the remaining $107,000 gain is a §1231 gain, computed as follows: DescriptionAmountExplanation(1) Current §1231 gain$157,000Given(2) Nonrecaptured §1231 losses$50,000Given(3) Ordinary income$50,000Lesser of (1) or (2)§1231 gain$107,000(1) − (3)
Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market value of the hotel in February is $725,000. (Assume that the alternative valuation date is not used.) Problem 11-33 Part-b b. If the fair market value of the hotel at the time of Mary's death was $500,000, what is Alan's basis?
$500,000. Alan will have an adjusted basis equal to the fair market value at the date of death even though it is lower than Mary's basis at the time of her death.
Rafael sold an asset to Jamal. What is Rafael's amount realized on the sale in each of the following alternative scenarios? Problem 11-32 Part-c c. Rafael received $20,000 cash, a parcel of land worth $50,000, and marketable securities of $10,000. Rafael also paid a commission of $8,000 on the transaction.
$72,000, computed as follows: DescriptionAmount Explanation(1)Cash received$20,000 (2)Land received 50,000 (3)Marketable securities 10,000 (4)Commissions (8,000) Amount Realized$72,000 (1) + (2) + (3) + (4)
Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market value of the hotel in February is $725,000. (Assume that the alternative valuation date is not used.) Problem 11-33 Part-a a. What is Alan's adjusted basis in the hotel?
$725,000. Alan will have an adjusted basis equal to the fair market value at the date of Mary's death.
Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp., at fair market value. The fair market value of the building was determined to be $325,000; Luke built the building several years ago at a cost of $200,000. Luke had claimed $45,000 of depreciation expense on the building. The fair market value of the land was determined to be $210,000 at the time of the sale; Luke purchased the land many years ago for $130,000. Problem 11-46 Part-b b. What is the amount and character of Luke's recognized gain or loss on the land?
$80,000 §1231 gain, computed as follows: DescriptionAmountExplanation(1)Amount Realized$210,000 (2)Original Basis 130,000 (3)Accumulated Depreciation 0 (4)Adjusted Basis 130,000(2) − (3) §1231 Gain recognized$80,000(1) − (4) §1239 does not apply to the land because it is not depreciable to the buyer.
Rafael sold an asset to Jamal. What is Rafael's amount realized on the sale in each of the following alternative scenarios? Problem 11-32 Part-a a. Rafael received $80,000 cash and a vehicle worth $10,000. Rafael also paid $5,000 in selling expenses.
$85,000, computed as follows: DescriptionAmountExplanation(1)Cash received$80,000 Given(2)Vehicle received 10,000 Given(3)Selling expenses (5,000)Given Amount Realized$85,000 (1) + (2) + (3)
Lassen Corporation sold a machine to a machine dealer for $25,000. Lassen bought the machine for $55,000 and has claimed $15,000 of depreciation expense on the machine. What gain or loss does Lassen realize on the transaction?
($15,000) loss, computed as follows: DescriptionAmountExplanation(1)Amount Realized$25,000 Given(2)Adjusted Basis 40,000 $55,000 original basis − $15,000 accumulated depreciation Gain (Loss) Realized$(15,000)(1) − (2)
On September 30 of last year, Rex received some investment land from Holly as a gift. Holly's adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character of Rex's recognized gain (loss) if he sells the land on May 12 this year at the following prices? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-37 Part-a a. $32,000
($8,000) short-term capital loss, computed as follows: DescriptionAmountExplanation(1)Amount Realized$32,000 (2)Adjusted Basis40,000 Rex's basis is the fair market value of the land at the date of the gift. Gain (Loss) Recognized($8,000)(1) − (2)
Franco converted a building from personal to business use in May 2016 when the fair market value was $55,000. He purchased the building in July 2013 for $80,000. On December 15 of this year, Franco sells the building for $40,000. On the date of sale, the accumulated depreciation on the building is $5,565. What is Franco's recognized gain or loss on the sale?
($9,435) loss, computed as follows: DescriptionAmountExplanation(1)Amount Realized$40,000 (2)Original basis for loss55,000 Fair market value on the date of conversion since fair market value was lower than basis at the time of conversion(3)Accumulated Depreciation5,565 Given(4)Adjusted basis at the date of the sale49,435 (2) − (3) Gain (Loss) Recognized($9,435)(1) − (4)
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-40 Part-d d. What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a corporation and the sale proceeds were decreased to $20,000?
-4000 0 -4000 ($4,000) §1231 loss treated as ordinary, computed as follows: DescriptionAmountExplanation(1)Amount Realized$20,000 Given(2)Original Basis56,000 Given(3)Accumulated Depreciation(32,000)Given(4)Adjusted basis24,000 (2) + (3)(5)Gain/(loss) Recognized($4,000)(1) − (4)(6)Ordinary income (§1245 depreciation recapture)$0 §1231 Loss($4,000)(5) − (6) Only gains are treated as ordinary income under §1245, any loss is §1231.
Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building Rayburn depreciated it by $100,000. What is the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-43 Part-c c. Rayburn receives $700,000.
-50000 0 -50000 $(50,000) §1231 loss treated as ordinary, computed as follows: DescriptionAmountExplanation(1) Amount Realized$700,000 Given(2) Original Basis 850,000 Given(3) Accumulated Depreciation 100,000 Given(4) Adjusted Basis 750,000 (2) − (3)(5) Gain/(Loss) Recognized$(50,000)(1) − (4)(6) §291 recapture percentage 20%§291(7) §291 recapture base$0 Lesser of (5) or (3), limited to zero(8) §291 recapture (ordinary income)$0 (6) × (7)§1231 loss$(50,000)(5) − (8)
Kase, an individual, purchased some property in Potomac, Maryland, for $150,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a parcel of land in North Carolina for Kase's Maryland property. Kase agrees to the exchange. What is Kase's realized gain or loss, recognized gain or loss, and basis in the North Carolina property in each of the following alternative scenarios? (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-56 Part-b b. The transaction qualifies as a like-kind exchange and the fair market value of each property is $100,000.
-50000 0 150000 Kase has a realized loss of ($50,000), but the recognized loss is $0 because the transaction qualifies as a like-kind exchange. Kase would have a carryover basis of $150,000. See the following computation: DescriptionAmountExplanation(1)Amount realized from property$100,000 Given(2)Amount realized from boot (cash)$0 Given(3)Total amount realized$100,000 (1) + (2)(4)Adjusted basis$150,000 Given(5)Loss realized$(50,000)(3) − (4)(6)Loss recognized$0 Lesser of (2) or (5), limited to 0.(7)Deferred loss$(50,000)(5) − (6) Adjusted basis in new property$150,000 (1) − (7)
Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by $32,000. What is the amount and character of the gain or loss Moran will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-44 Part-c c. Moran received $110,000.
-8000 0 -8000 §1231 loss of ($8,000), calculated as follows: DescriptionAmount Explanation(1)Amount Realized$110,000 Given(2)Original Basis 150,000 Given(3)Accumulated Depreciation 32,000 Given(4)Adjusted Basis 118,000 (2) − (3)(5)Gain/(Loss) Recognized$(8,000)(1) − (4)(6)Unrecaptured §1250 gain (and §1231 gain)$0 Lesser of (5) or (3) but not below zero.(7)Remaining §1231 loss$(8,000)(5) − (6)(8)Total §1231 loss$(8,000)(6) + (7)
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-d d. Inventory White purchased 13 months ago that is ready to be shipped to a customer.
. Ordinary, because inventory is held in the ordinary course of business.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-h h. Machinery White held for three years and then sold at a loss of $10,000.
. §1231, because the property is used in a trade or business and held for more than one year.
Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. Net §1231 gains shown are before the look-back rule. (Leave no answer blank. Enter zero if applicable.) Net §1231YearGains/(Losses)Year 1$(65,000)Year 215,000Year 30Year 40Year 510,000Year 60Year 7 (current year)50,000 Problem 11-54 Part-a a. What amount, if any, of the year 7 (current year) $50,000 net §1231 gain is treated as ordinary income?
0 After applying the §1231 five-year look back rule, the entire $50,000 is long-term capital gain. YearNet §1231 gain(loss)Recaptured/ Nonrecaptured §1231 lossesNotesOrdinary LTCGYear 1$(65,000)$0 Loss is ordinary$(65,000) $(65,000)Nonrecaptured losses Year 2$15,000 $15,000 Gain is ordinary$15,000 $(50,000)Nonrecaptured losses Year 3$0 $0 $(50,000)Nonrecaptured losses Year 4$0 $0 $(50,000)Nonrecaptured losses Year 5$10,000 $10,000 Gain is ordinary$10,000 $(40,000)Nonrecaptured losses Year 6$0 $0 Nonrecaptured losses $0 only carryforward 5 years Year 7$50,000 $50,000 $50,000 is §1231 $50,000 $0
Prater Inc. enters into an exchange in which it gives up its warehouse on 10 acres of land and receives a tract of land. A summary of the exchange is as follows: OriginalAccumulatedTransferredFMVBasisDepreciationWarehouse$300,000$225,000$45,000Land 50,000 50,000 Mortgage on warehouse 30,000 Cash 20,000 20,000 Assets ReceivedFMVLand$340,000 What is Prater's realized and recognized gain on the exchange and its basis in the assets it received in the exchange?
120000 10000 230000 Gain realized is $120,000, gain recognized is $10,000, and Prater's adjusted basis in the land is $230,000. DescriptionAmountExplanation(1)Amount realized in like-kind$340,000Given. FMV of land(2)Amount realized from boot$30,000Mortgage relief(3)Total amount realized$370,000(1) + (2)(4)Adjusted basis$250,000$225,000 − $45,000 + $50,000 (land) + $20,000 (cash)(5)Gain realized$120,000(3) − (4)(6)Gain recognized$10,000Lesser of [(2) − cash paid or liability assumed] or (5)*(7)Deferred gain$110,000(5) − (6) Adjusted basis in new property$230,000(1) − (7) *Prater has debt relief of $30,000 and can offset this boot with cash paid of $20,000. The offset rules allow a taxpayer to offset debt relief with cash paid or with other liabilities assumed. Consequently, Prater is allowed to net the debt relief against cash paid and he is treated as receiving only the $10,000 net liabilities he's been relieved of as boot.
Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building Rayburn depreciated it by $100,000. What is the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-43 Part-b b. Rayburn receives $900,000.
150000 20000 130000 $20,000 ordinary income and $130,000 §1231 gain computed as follows: DescriptionAmountExplanation(1) Amount Realized$900,000 Given(2) Original Basis 850,000 Given(3) Accumulated Depreciation 100,000 Given(4) Adjusted Basis 750,000 (2) − (3)(5) Gain/(Loss) Recognized$150,000 (1) − (4)(6) §291 recapture percentage 20%§291(7) §291 recapture base 100,000 Lesser of (5) or (3)(8) §291 recapture (ordinary income)$20,000 (6) × (7)§1231 gain$130,000 (5) − (8)
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-40 Part-a a. What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a partnership?
18000 18000 0 $18,000 ordinary income, computed as follows: DescriptionAmountExplanation(1)Amount Realized$42,000 Given(2)Original Basis 56,000 Given(3)Accumulated Depreciation 32,000 Given(4)Adjusted basis 24,000 (2) − (3)(5)Gain/(Loss) Recognized$18,000 (1) − (4)(6)Ordinary Income (§1245 Depreciation Recapture)$18,000 Lesser of (3) or (5) §1231 Gain$0 (5) − (6) Because the entire gain is caused by depreciation deductions, the entire gain is treated as ordinary income under §1245.
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-40 Part-b b. What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a corporation?
18000 18000 0 $18,000; there is no difference in calculating the amount and character of the gain between a partnership and a corporation on §1245 property.
Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by $32,000. What is the amount and character of the gain or loss Moran will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-44 Part-a a. Moran received $145,000.
27000 27000 0 $27,000 unrecaptured §1250 gain, which is §1231 gain subject to a maximum tax rate of 25 percent, computed as follows: DescriptionAmountExplanation(1) Amount Realized$145,000 Given(2) Original Basis 150,000 Given(3) Accumulated Depreciation 32,000 Given(4) Adjusted Basis 118,000 (2) − (3)(5) Gain/(Loss) Recognized$27,000 (1) − (4)(6) Unrecaptured §1250 gain(and §1231 gain)$27,000 Lesser of (5) or (3)(7) Remaining §1231 gain$0 (5) - (6)Total §1231 gain$27,000 (6) + (7)
In year 0, Canon purchased a machine to use in its business for $56,000. In year 3, Canon sold the machine for $42,000. Between the date of the purchase and the date of the sale, Canon depreciated the machine by $32,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-40 Part-c c. What is the amount and character of the gain or loss Canon will recognize on the sale, assuming that it is a corporation and the sale proceeds were increased to $60,000?
36000 32000 4000 $36,000 gain ($32,000 ordinary and $4,000 §1231) computed as follows: DescriptionAmountExplanation(1)Amount Realized$60,000 Given(2)Original Basis 56,000 Given(3)Accumulated Depreciation 32,000 Given(4)Adjusted Basis 24,000 (2) − (3)(5)Gain/(loss) recognized$36,000 (1) − (4)(6)Ordinary income (§1245 depreciation recapture)$32,000 Lesser of (3) or (5) §1231 Gain$4,000 (5) − (6) Only the gain caused by depreciation is treated as ordinary income under §1245, the remaining gain is §1231.
Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. Net §1231 gains shown are before the look-back rule. (Leave no answer blank. Enter zero if applicable.) Net §1231YearGains/(Losses)Year 1$(65,000)Year 215,000Year 30Year 40Year 510,000Year 60Year 7 (current year)50,000 Problem 11-54 Part-b b. Assume that the $50,000 net §1231 gain occurs in year 6 instead of year 7. What amount of the gain would be treated as ordinary income in year 6?
40000 After applying the §1231 five-year look back rule, $40,000 is ordinary income and $10,000 is long-term capital gain. YearNet §1231 gain(loss)Recaptured/Nonrecaptured§1231 lossesNotesOrdinary LTCGYear 1$(65,000)$0 Loss is ordinary$(65,000) $(65,000)Nonrecaptured losses Year 2$15,000 $15,000 Gain is ordinary$15,000 $(50,000)Nonrecaptured losses Year 3$0 $0 $(50,000)Nonrecaptured losses Year 4$0 $0 $(50,000)Nonrecaptured losses Year 5$10,000 $10,000 Gain is ordinary$10,000 $(40,000)Nonrecaptured losses Year 6$50,000 $40,000 Gain is ordinary$40,000 $10,000 §1231 $10,000 $0 Nonrecaptured losses only carryforward 5 years
Moran owns a building he bought during year 0 for $150,000. He sold the building in year 6. During the time he held the building he depreciated it by $32,000. What is the amount and character of the gain or loss Moran will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-44 Part-b b. Moran received $170,000.
52000 32000 20000 §1231 gain of $52,000. Of the $52,000, $32,000 is unrecaptured §1250 gain subject to a maximum 25 percent tax rate and the remaining $20,000 is §1231 gain subject to a maximum rate of 0/15/20 percent. See the following calculations: DescriptionAmountExplanation(1) Amount Realized$170,000 Given(2) Original Basis 150,000 Given(3) Accumulated Depreciation 32,000 Given(4) Adjusted Basis 118,000 (2) − (3)(5) Gain/(Loss) Recognized$52,000 (1) − (4)(6) Unrecaptured §1250 gain (and §1231 gain) 32,000 Lesser of (5) or (3)(7) Remaining §1231 gain$20,000 (5) - (6)Total §1231 gain$52,000 (6) + (7)
Kase, an individual, purchased some property in Potomac, Maryland, for $150,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a parcel of land in North Carolina for Kase's Maryland property. Kase agrees to the exchange. What is Kase's realized gain or loss, recognized gain or loss, and basis in the North Carolina property in each of the following alternative scenarios? (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) Problem 11-56 Part-a a. The transaction qualifies as a like-kind exchange and the fair market value of each property is $675,000.
525000 0 150000 Even though Kase has a realized gain of $525,000, the recognized gain is $0 because the transaction qualifies as a like-kind exchange and Kase did not receive any boot. Kase receives a carryover basis of $150,000 in the North Carolina property (the same basis Kase had in the Maryland property). See the following computation: DescriptionAmountExplanation(1)Amount realized from property$675,000Given(2)Amount realized from boot (non like-kind property)$0Given(3)Total amount realized$675,000(1) + (2)(4)Adjusted basis$150,000Given(5)Gain realized$525,000(3) − (4)(6)Gain recognized$0Lesser of (2) or (5)(7)Deferred gain$525,000(5) − (6) Adjusted basis in new property$150,000(1) − (7)
Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building Rayburn depreciated it by $100,000. What is the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations? (Loss amounts should be indicated by a minus sign. Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-43 Part-a a. Rayburn receives $840,000.
90000 18000 72000 $18,000 ordinary income and $72,000 §1231 gain computed as follows: DescriptionAmountExplanation(1) Amount Realized$840,000 Given(2) Original Basis 850,000 Given(3) Accumulated Depreciation 100,000 Given(4) Adjusted Basis 750,000 (2) − (3)(5) Gain/(Loss) Recognized$90,000 (1) − (4)(6) §291 recapture percentage 20%§291(7) §291 recapture base 90,000 Lesser of (5) or (3)(8) §291 recapture (ordinary income)$18,000 (6) × (7)§1231 gain$72,000 (5) − (8)
On September 30 of last year, Rex received some investment land from Holly as a gift. Holly's adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character of Rex's recognized gain (loss) if he sells the land on May 12 this year at the following prices? (Enter NA if a situation is not applicable. Leave no answer blank. Enter zero if applicable.) Problem 11-37 Part-c c. $45,000
No gain or loss is realized. DescriptionAmountExplanation(1)Amount Realized$45,000 (2)Adjusted Basis 45,000Rex's basis is deemed to be equal to the amount realized since the amount realized falls between the basis for loss and the basis for gain. Gain (Loss) Recognized$0(1) − (2)
Russell Corporation sold a parcel of land valued at $400,000. Its basis in the land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a note providing that Russell will receive $175,000 in year 1 and $175,000 in year 2 from the buyer. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Problem 11-63 Part-b b. What is Russell's recognized gain in year 0, year 1, and year 2?
Russell recognizes $15,625 in year 0, $54,688 in year 1, and $54,688 in year 2. See the following calculations: DescriptionAmountExplanation(1) Sales price$400,000 (2) Adjusted basis$275,000 (3) Realized Gain/Gross profit$125,000 (1) − (2)(4) Contract price$400,000 (1) - assumed liabilities (-0-)(5) Gross profit percentage 31.25%(3) / (4)(6) Payment received in year 0$50,000 Gain recognized in year 0$15,625 (6) × (5)(7) Payment received in year 1$175,000 Gain recognized in year 1$54,688 (7) × (5)(8) Payment received in year 2$175,000 Gain recognized in year 2$54,688 (8) × (5) Note that all of the $125,000 gain realized is recognized over the three-year period.
Russell Corporation sold a parcel of land valued at $400,000. Its basis in the land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a note providing that Russell will receive $175,000 in year 1 and $175,000 in year 2 from the buyer. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Problem 11-63 Part-a a. What is Russell's realized gain on the transaction?
Russell's realized gain is $125,000 (Sales price of $400,000 less adjusted basis of $275,000).
Bourne Guitars, a corporation, reported a $157,000 net §1231 gain for year 6. Problem 11-51 Part-b b. Assuming Bourne's nonrecaptured net §1231 losses from years 1-5 were $200,000, what amount of Bourne's net §1231 gain for year 6, if any, is treated as ordinary income?
The entire $157,000 gain would be ordinary income due to the §1231 look-back rule.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-b b. Two years ago, White purchased land and a warehouse. It uses these assets in its business.
The land and building are both §1231 property because White uses the assets in its trade or business and has held the assets property for more than a year.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-c c. Manufacturing machinery White purchased earlier this year.
The property is ordinary even though it is used in a trade or business because it has been held for less than one year. Once White has held the machinery for more than a year, it will become §1231 property.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-a a. Two years ago, White used its excess cash to purchase a piece of land as an investment.
a. Capital, because it is held for investment.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-e e. Office equipment White has used in its business for the past three years.
e. §1231, because the property is used in a trade or business and held for more than one year.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-f f. 1,000 shares of stock in Black corporation that White purchased two years ago because it was a good investme
f. Capital, because it is held for investment.
Identify each of White Corporation's following assets as an ordinary, capital, or §1231 asset. Problem 11-39 Part-g g. Account receivable from a customer with terms 2/10, net 30.
g. Ordinary, because accounts receivable are created in the ordinary course of business.
