Property - Real and Personal
Alf owns all of the shares of Waxman Corporation, a manufacturer of finished leather products. Alf also owns a 60% partnership interest and his friend Richard owns a 40% partnership interest in York Real Estate Rentals, LLC. York Real Estate Rentals owns and leases warehouse space to numerous businesses. In 2022, York Real Estate Rentals sold a building with an adjusted basis of $100,000 to Waxman Corporation for $80,000. What is the amount of York Real Estate Rentals' deductible loss in 2022 from this transaction? $(20,000) $(12,000) $(8,000) $0
$0. Controlled entities (50% ownership) are considered related parties for tax purposes. So, no recognized loss. Publication 550, page 48, provides that a taxpayer cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between the taxpayer and the following related parties: Members of the taxpayer's family, which include only the taxpayer's brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.) A partnership in which the taxpayer directly or indirectly owns more than 50% of the capital interest or the profits interest A corporation in which the taxpayer directly or indirectly owns more than 50% in value of the outstanding stock A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by the taxpayer or by a member of the taxpayer's family, whether or not this control is legally enforceable Since Alf owns more than 50% in both the partnership and the corporation that are exchanging the asset, no loss can be deducted. Publication 550, page 48
Larry purchased stock in 2020 for $100. During 2021, he received a return of capital of $80 on this stock. During 2022, he received another return of capital of $30. Larry had no other stock transactions in 2022. What amount should he report on his 2022 income tax return and what is his basis in the stock at the end of 2022? $30 capital gain, $100 stock basis $30 dividend income, $100 stock basis $10 capital gain, zero stock basis $10 dividend income, zero stock basis
$10 capital gain, zero stock basis Publication 550, page 20, states, in part, that a non-dividend distribution (also known as a return of capital distribution) is a distribution that is not paid out of the earnings and profits of a corporation. It is a return of the investor's investment in the stock of the company. In such a case, the taxpayer should receive a Form 1099-DIV or other statement from the corporation showing what part of the distribution is a return of capital. On 2022 Form 1099-DIV, a nontaxable return of capital will be shown in box 3. A nondividend distribution (i.e., a return of capital reduces the basis of the taxpayer's stock. It is not taxed until the basis in the stock is fully recovered. If the taxpayer buys stock in a corporation in different lots at different times, and the taxpayer cannot definitely identify the shares subject to the return of capital, the taxpayer should reduce the basis of the earliest purchases first. Furthermore, when the basis of the stock has been reduced to zero, report any additional return of capital that the taxpayer receives as a capital gain. Whether the taxpayer reports it as a long-term or short-term capital gain depends on how long the taxpayer has held the stock. Example You bought stock in 2019 for $100. In 2021, you received a return of capital of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a return of capital of $30 in 2022. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2022. You must report as a long-term capital gain any return of capital you receive on this stock in later years. In this case, Larry has a basis of $20 ($100 less $80) after the nontaxable distribution of $80 in 2021. The $30 distribution by the company in 2022 results in a further basis reduction of $20 and a $10 long-term capital gain, which is the excess over basis. Publication 550, page 20
Dennis and Martha sell their lake house (which they have owned for 10 years and spend each summer in) for $250,000. Their original cost was $175,000, and they had improvements of $25,000. They have never used the house as a business or rental property. They agreed to take $50,000 down and finance the balance. Monthly payments are to begin next year. How much capital gain must they report in the year of sale? $10,000 $50,000 $15,000 $0
$10,000 In the case of an installment sale, a certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing the taxpayer's gross profit from the sale by the contract price. The gross profit percentage generally remains the same for each payment the taxpayer receives. (Publication 537, page 4) To figure the adjusted basis and gross profit percentage for an installment sale, the following worksheet (see Worksheet A, Publication 537, page 3) is used: 1. Enter the selling price for the property. 1._____ 2. Enter your adjusted basis for the property. ====================================2._____ 3. Enter your selling expenses.===== 3._____ 4. Enter any depreciation recapture.=4._____ 5. Add lines 2, 3, and 4. This is your adjustedbasis for installment sale purposes. ---------------------------------------------------5._____ 6. Subtract line 5 from line 1. If zero or less,enter -0-. -------------------------------------------6.____ _This is your gross profit.If the amount entered on line 6 is zero, Stophere. You cannot use the installment method. 7. Enter the contract price for the property . ---------------------------------------------------7._____ 8. Divide line 6 by line 7. This is your grossprofit percentage. --------------------------------------------------------------------------------------8._____ In this problem, Dennis and Martha sell their lake house for $250,000 (item 1) and the house has an adjusted basis for installment sale purposes of $200,000 (item 2), which is the cost of $175,000 plus improvements of $25,000. There are no selling expenses for item 3. The gross profit percentage is 20%, which is the gross profit of $50,000 ($250,000 − $200,000) divided by the selling price of $250,000. Therefore, the capital gain from the $50,000 down payment is $10,000, which is 20% of the $50,000.
Ed purchased a house on an acre of land from Ruth on June 30, 2022. Prior to the purchase, Ed had been renting the house from Ruth for $500 per month. Ed paid the following amounts: $100,000 in loan proceeds to Ruth $2,000 in points to the bank $1,000 in real estate taxes Ruth owed to the town $1,000 in past due rent to Ruth $1,000 in closing costs to the bank for legal, recording, title insurance, and survey fees $1,000 in escrowed real estate taxes to the bank What is Ed's basis in the house and land purchased from Ruth? $100,000 $102,000 $104,000 $106,000
$102,000 Publication 551, pages 2-3, provides that the basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services. In addition, some settlement fees or closing costs can be included in the basis of the property, which includes: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including title search and preparation of the sales contract and deed), recording fees, surveys, transfer taxes, owner's title insurance, and any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Other settlement costs that are not included in the basis of property include: casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before closing, charges connected with getting a loan such as points, mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender, and fees for refinancing a mortgage. Given the information above, Ed has a basis of $102,000 from the purchase of the property. This basis is the sum of the property cost ($100,000), closing costs of $1,000 to the bank for legal, recording, title insurance, and survey fees (these are closing costs, which are not deductible) and $1,000 in real estate taxes Ruth owed to the town. Publication 551, pages 2-3
Ed purchased a house on an acre of land from Ruth on June 30, 2022. Prior to the purchase, Ed had been renting the house from Ruth for $500 per month. Ed paid the following amounts: $100,000 in loan proceeds to Ruth $2,000 in points to the bank $1,000 in real estate taxes Ruth owed to the town $1,000 in past due rent to Ruth $1,000 in closing costs to the bank for legal, recording, title insurance, and survey fees $1,000 in escrowed real estate taxes to the bank What is Ed's basis in the house and land purchased from Ruth? $100,000 $102,000 $104,000 $106,000
$102,000 Publication 551, pages 2-3, provides that the basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services. In addition, some settlement fees or closing costs can be included in the basis of the property, which includes: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including title search and preparation of the sales contract and deed), recording fees, surveys, transfer taxes, owner's title insurance, and any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Other settlement costs that are not included in the basis of property include: casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before closing, charges connected with getting a loan such as points, mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender, and fees for refinancing a mortgage. Given the information above, Ed has a basis of $102,000 from the purchase of the property. This basis is the sum of the property cost ($100,000), closing costs of $1,000 to the bank for legal, recording, title insurance, and survey fees (these are closing costs, which are not deductible) and $1,000 in real estate taxes Ruth owed to the town. Publication 551, pages 2-3
A taxpayer purchased a rental property for $100,000. The taxpayer gave $25,000 as a cash down payment and financed $75,000. Closing costs were $4,000 and points were $4,000. What is his basis in the property? $33,000 $108,000 $104,000 $100,000
$104,000 A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services (Publication 551, pages 2 and 3). In addition, some settlement fees or closing costs can be included in the basis of the property, which includes the following: Abstract fees (abstract of title fees) Charges for installing utility services Legal fees (including title search and preparation of the sales contract and deed) Recording fees Surveys Transfer taxes Owner's title insurance Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions Not all settlement fees are added to the basis. A list of these exceptions can be found on page 3 of Publication 551. Points, likewise, are not added to the basis. Given the information above, the taxpayer in this problem has a basis of $104,000, which is the sum of the cost of the property ($100,000) and the closing costs ($4,000). The basis does not include the $4,000 for points that were paid. Publication 551, pages 2-3
Beth and Donnie purchased a house to use as rental property. They paid the following amounts: $100,000 cash, assumption of an existing $25,000 mortgage, title search $500, recording fees of $100, points for their new loan of $1,000, and the seller's part of the property taxes of $1,500. The seller did not reimburse them for the property taxes. What is their cost basis in the house? $100,000 $125,000 $127,100 $128,100
$127,100 The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services (see Publication 551, pages 2 and 3). In addition, some settlement fees or closing costs can be included in the basis of the property, which includes the following: Abstract fees (abstract of title fees) Charges for installing utility services Legal fees (including title search and preparation of the sales contract and deed) Recording fees Surveys Transfer taxes Owner's title insurance Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions Casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before settlement, fees for refinancing a mortgage, and points are a few of the settlement fees and closing costs that a taxpayer cannot include in the basis of property (see Publication 551, page 3). Given the information above, the taxpayer in this problem has a basis of $127,100 from the purchase of the property. This basis is the sum of the property cost ($100,000), assumption of an existing mortgage ($25,000), title search ($500), recording fees ($100), and the seller's part of the property taxes ($1,500). The points can be deducted as interest in the current year. See Publication 551, pages 2 and 3, for more information on this calculation.
Beth and Donnie purchased a house to use as rental property. They paid the following amounts: $100,000 cash, assumption of an existing $25,000 mortgage, title search $500, recording fees of $100, points for their new loan of $1,000, and the seller's part of the property taxes of $1,500. The seller did not reimburse them for the property taxes. What is their cost basis in the house? $100,000 $125,000 $127,100 $128,100
$127,100 The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services (see Publication 551, pages 2 and 3). In addition, some settlement fees or closing costs can be included in the basis of the property, which includes the following: Abstract fees (abstract of title fees) Charges for installing utility services Legal fees (including title search and preparation of the sales contract and deed) Recording fees Surveys Transfer taxes Owner's title insurance Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions Casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before settlement, fees for refinancing a mortgage, and points are a few of the settlement fees and closing costs that a taxpayer cannot include in the basis of property (see Publication 551, page 3). Given the information above, the taxpayer in this problem has a basis of $127,100 from the purchase of the property. This basis is the sum of the property cost ($100,000), assumption of an existing mortgage ($25,000), title search ($500), recording fees ($100), and the seller's part of the property taxes ($1,500). The points can be deducted as interest in the current year. See Publication 551, pages 2 and 3, for more information on this calculation. Publication 551, pages 2-3
Clyde, a single person, sold his principal residence for $700,000. He purchased his home in 2013 for $150,000 and lived there until he sold it. He paid for capital improvements of $75,000, paid real estate commissions of $36,000, and other settlement costs of $4,000. How much taxable gain must Clyde report? None $185,000 $435,000 $225,000
$185,000 The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true: The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years) The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 523, page 3) In this problem, the taxpayer presumably satisfies the special rule for excluding $250,000. Thus, the gain from the sale to Clyde is $185,000, which is the sale price of $700,000 less the property's basis of $150,000, less the capital improvements of $75,000, less the real estate commissions of $36,000, less other settlement costs of $4,000, and less the exclusion amount of $250,000.
In 2022, Tran received a vacant parcel of land from her uncle as a gift. Tran's uncle purchased the land in 2008 for $15,000, and at the time of the gift to his niece, he paid $500 in gift tax based on the land's fair market value of $13,000. Tran did not have any other events that increased or decreased her basis in the gift after she received it. What is her gain if she sold her property for $17,000? $4,000 gain $3,500 gain $2,000 gain $1,500 gain
$2,000 gain In order to calculate the basis of property received as a gift, the adjusted basis of the donor just before it was given, the fair market value at the time of the gift, and any gift tax paid must be known. If the gift received has an adjusted basis that is greater than the fair market value at the time of the gift, the basis of the gifted property is contingent on how the asset is sold, at a loss or at a gain: The basis, when there is a gain, is the same as the donor's basis plus or minus any required basis adjustments. The basis, when a loss occurs, is the fair market value of the property on the date of gift, plus or minus any required basis adjustments. In this case, the FMV of the property was lower than the donor's adjusted basis; the gift taxes are not added to the basis for the taxpayer since the asset is being sold for more than the FMV of the property when it was received by Tran. In fact, she is selling the property at a gain. The gain for Tran, therefore, would be $2,000, which is the selling price of $17,000 less the basis of $15,000. Publication 551, page 9
In 2022, Tran received a vacant parcel of land from her uncle as a gift. Tran's uncle purchased the land in 2008 for $15,000, and at the time of the gift to his niece, he paid $500 in gift tax based on the land's fair market value of $13,000. Tran did not have any other events that increased or decreased her basis in the gift after she received it. What is her gain if she sold her property for $17,000? $4,000 gain $3,500 gain $2,000 gain $1,500 gain
$2,000 gain In order to calculate the basis of property received as a gift, the adjusted basis of the donor just before it was given, the fair market value at the time of the gift, and any gift tax paid must be known. If the gift received has an adjusted basis that is greater than the fair market value at the time of the gift, the basis of the gifted property is contingent on how the asset is sold, at a loss or at a gain: The basis, when there is a gain, is the same as the donor's basis plus or minus any required basis adjustments. The basis, when a loss occurs, is the fair market value of the property on the date of gift, plus or minus any required basis adjustments. In this case, the FMV of the property was lower than the donor's adjusted basis; the gift taxes are not added to the basis for the taxpayer since the asset is being sold for more than the FMV of the property when it was received by Tran. In fact, she is selling the property at a gain. The gain for Tran, therefore, would be $2,000, which is the selling price of $17,000 less the basis of $15,000. Publication 551, page 9
During 2022, Frank sold a piece of land with an adjusted basis of $110,000 to Tony for $200,000. Tony paid $50,000 as a down payment in 2022 and agreed to pay $30,000 per year plus interest for the next 5 years beginning in January 2023. Frank incurred selling expenses of $10,000. What is the amount of gain to be included in Frank's gross income for 2022? $18,000 $20,000 $22,500 $32,000
$20,000 Publication 537, pages 2 and 3, provides that an installment sale is a sale of property where a taxpayer receives at least one payment after the tax year of the sale. If the taxpayer realizes a gain on an installment sale, the taxpayer may be able to report part of the gain when it is received with each payment. This method of reporting gain is called the installment sale method. If the taxpayer prefers, they can elect out of the installment sale method and choose to report all of their gain in the year of sale. On the other hand, a taxpayer cannot use the installment method to report a loss (although it is unknown why a taxpayer would want to defer the write-off). (Publication 537, pages 4 and 5) In the case of an installment sale, a certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing the taxpayer's gross profit from the sale by the contract price. The gross profit percentage generally remains the same for each payment the taxpayer receives. (Publication 537, page 4) To figure the adjusted basis and gross profit percentage for an installment sale, the following worksheet (see Worksheet A, Publication 537, page 3) is used: 1. Enter the selling price for the property.---------------------------------------------------------------------------------------1._____ 2. Enter your adjusted basis for the property. 2._____ 3. Enter your selling expenses. 3._____ 4. Enter any depreciation recapture. 4._____ 5. Add lines 2, 3, and 4. This is your adjustedbasis for installment sale purposes. 5._____ 6. Subtract line 5 from line 1. If zero or less,enter -0-. 6._____ This is your gross profit.If the amount entered on line 6 is zero, Stophere. You cannot use the installment method.7. Enter the contract price for the property. 7._____ 8. Divide line 6 by line 7. This is your grossprofit percentage. ------------------------------------------------------------------8._____ In this problem, Frank sells his proper
Charles died and left his daughter Sue a commercial rental property. He purchased the property for $150,000 and had taken $45,000 in depreciation. The fair market value (FMV) on his death was $200,000. Six months after his death, the property was re-titled into Sue's name by the estate's representative. There was no alternative valuation done on the transfer. The FMV on that day was $210,000. Sue's basis in the property is: $210,000. $200,000. $150,000. $125,000.
$200,000. As provided in Publication 551, page 10, the basis of property that is received from a decedent is generally: the FMV of the property at the date of the individual's death or the FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. In this problem, the alternate valuation date was not elected; the FMV on the date of death (i.e., $200,000) becomes the rental property's basis for Sue. Publication 551, page 10
Mr. Rabbitt purchased a home for $200,000. He incurred the following additional expenses: $200 fire insurance premiums $500 mortgage insurance premiums $400 recording fees $250 owner's title insurance Compute his basis in the property. $201,350 $200,000 $200,650 $201,150
$200,650 The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services. In addition, some settlement fees or closing costs can be included in the basis of the property, which includes: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including title search and preparation of the sales contract and deed), recording fees, surveys, transfer taxes, owner's title insurance, and any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Other settlement costs that are not included in the basis of property include: casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before closing, charges connected with getting a loan such as points, mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender, and fees for refinancing a mortgage. Points are one of the settlement fees and closing costs that a taxpayer cannot include in the basis of property (see Publication 551, pages 2-3). Given the information above, the taxpayer in this problem has a basis of $200,650 from the purchase of the property. This basis is the sum of the property cost ($200,000), recording fees ($400), and owner's title insurance ($250). Publication 551, page 2-3
Anne, who is single, owned and used her house as her main home from January 2017 until January 2021. She then moved away and rented her home from February 2021 until she sold it in August 2022. Her home sold for $240,000, which included $20,000 of depreciation and $12,000 of selling expenses. Using a zero basis, compute the amount that is excludable from income. $208,000 $220,000 $228,000 $240,000
$208,000 The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true. The taxpayer meets the ownership test (i.e., own the home for at least 2 of the last 5 years). The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 523, page 3) In this problem, the taxpayer satisfies the special rule for excluding $250,000. However, if the taxpayer was entitled to take depreciation deductions because the home was used for business purposes or as rental property, the taxpayer cannot exclude the part of the gain equal to any depreciation allowed as a deduction for periods after May 6, 1997. (Publication 523, page 15) Thus, the gain from the sale that is excludable is $208,000, which is the amount realized (amount received of $240,000 less property's basis of $0, the depreciation taken of $20,000, and the selling expenses of $12,000. Publication 523, pages 3 and 15
Mary, a single woman, bought her home in June 2020 for $350,000. She lived in the house with her mother until she sold it in July 2022 for $900,000. What amount of the gain is Mary able to exclude? $0 $250,000 $500,000 $550,000
$250,000 The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary residence, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true: The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years). The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. (Publication 523, page 3) Be aware that there are some exceptions in this area, which are covered more thoroughly in Publication 523, pages 3 through 6. In this problem, the taxpayer satisfies the special rule for excluding up to $250,000. Even though her mother lives in the home, Mary cannot exclude an additional $250,000 on behalf of her mother. The additional exclusion amount is permitted only for spouses. Thus, the gain that Mary must report from the sale (before excluding the $250,000) is $550,000, which is the amount received from the sale of $900,000 less the property's basis of $350,000. Publication 523, pages 3-6
Joe exchanged a building for another like-kind building. Joe had a basis of $16,000, plus he had made $10,000 in improvements prior to the exchange. He exchanged it for a building worth $36,000. Joe did not recognize any gain from the exchange on his 2022 individual tax return. What is Joe's basis in the new property? $26,000 $36,000 $10,000 $16,000
$26,000 Publication 544, page 12, provides a discussion on the basis of property received in a like-kind exchange. If the taxpayer acquires property in a like-kind exchange, the basis of that property is the same as the basis of the property transferred by the taxpayer. Example A taxpayer exchanged real estate held for investment with an adjusted basis of $25,000 for other real estate held for investment. The basis of the taxpayer's new property is the same as the basis of the old ($25,000). If, in addition to giving up like-kind property, the taxpayer pays money in a like-kind exchange, the taxpayer still has no recognized gain or loss. The basis of the property received, on the other hand, is the basis of the property given up, increased by the money paid. Be aware that an exchange of personal property for real property does not qualify as a like-kind exchange. In this case, Joe's basis in the new building is $26,000, which is the basis of the old building given by Joe ($16,000 basis plus $10,000 in improvements).
Joe exchanged a building for another like-kind building. Joe had a basis of $16,000, plus he had made $10,000 in improvements prior to the exchange. He exchanged it for a building worth $36,000. Joe did not recognize any gain from the exchange on his 2022 individual tax return. What is Joe's basis in the new property? $26,000 $36,000 $10,000 $16,000
$26,000 Publication 544, page 12, provides a discussion on the basis of property received in a like-kind exchange. If the taxpayer acquires property in a like-kind exchange, the basis of that property is the same as the basis of the property transferred by the taxpayer. Example A taxpayer exchanged real estate held for investment with an adjusted basis of $25,000 for other real estate held for investment. The basis of the taxpayer's new property is the same as the basis of the old ($25,000). If, in addition to giving up like-kind property, the taxpayer pays money in a like-kind exchange, the taxpayer still has no recognized gain or loss. The basis of the property received, on the other hand, is the basis of the property given up, increased by the money paid. Be aware that an exchange of personal property for real property does not qualify as a like-kind exchange. In this case, Joe's basis in the new building is $26,000, which is the basis of the old building given by Joe ($16,000 basis plus $10,000 in improvements). Publication 544, page 12
Charles gave his daughter, Jane, a residential house. He had purchased the house for $250,000 in 2008. The fair market value on the date of the gift was $300,000. Charles had added a $25,000 roof the year before he gave it to Jane. Jane converts the house to a residential rental property within 1 year of the gift. Jane's basis in the property is: $300,000. $250,000. $225,000. $275,000.
$275,000. A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. The basis of property that is received as a gift is the same as the donor's adjusted basis at the time of gift if the fair market value of the property is equal to or greater than the donor's adjusted basis. Therefore, Jane's basis in the property received from Charles is $275,000, which is calculated as the sum of the adjusted basis to Charles on the date of the gift of $250,000 and the additional cost for the roof of $25,000. (Publication 551, page 9) Publication 551, page 10 provides that if the property is converted from personal to business, the basis is the lesser of the following two amounts: The FMV of the property on the date of the conversion The adjusted basis on the date of the conversion In this case, we must assume that the adjusted basis of the gifted property is less than the FMV on the date of conversion since information to the contrary is not provided. Therefore, Jane's basis in the property is $275,000. Publication 551, pages 9-10
Thomas loaned friend Susan $10,000 for a down payment on a home. Thomas and Susan signed a note in which Susan agreed to pay $100 a month with an interest rate of 4% until the loan was completely paid. Susan lost both her job and her home in 2021. She filed bankruptcy and went to live with her mother. Thomas sued Susan in court for nonpayment in August 2022, but the court dissolved her debt to Thomas based upon the bankruptcy. When Susan defaulted, the outstanding balance due on the note was $7,000. If Thomas had only wage income reportable during the year, how much would his deductible bad debt be in 2022? $7,000 $6,900 $3,000 $10,000
$3,000 If money owed to a taxpayer becomes uncollectible in a given tax year, the taxpayer may have an allowable deduction for bad debt. To be deductible, nonbusiness bad debts must be totally worthless. A person cannot deduct a partly worthless nonbusiness debt. The bad debt must arise from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Those bad debts, incurred outside of operating a business or trade, are categorized as nonbusiness bad debt. Nonbusiness bad debts are deducted as a short-term capital loss on Form 8949, which are then transferred to Schedule D (Form 1040) and are deductible when deemed totally worthless. (Publication 550, pages 54 and 55) Publication 550, page 66, further provides that capital losses are subject to a $3,000 ($1,500 for married filing separate) per year deduction limitation. Although Thomas has a bad debt of $7,000 that can be deducted as a short-term capital loss, he is limited to $3,000 in 2022 and will carry forward the remaining $4,000 to his 2023 tax return. Publication 550, pages 54-55 and 66
Zack had the following capital transactions during 2022: 2/1/2022—bought 10 shares of ABC stock at $100 per share 6/1/2022—sold 100 shares of PDQ stock for $50 per share; was purchased 2/1/2021 at $100 per share 9/9/2022—sold the 10 shares of ABC stock for $150 per share How much can Zack deduct as a capital loss on his return for 2022? (His taxable income is $30,000.) $4,500 net long-term capital loss; $0 carryover $3,000 net long-term capital loss; $1,500 long-term capital loss carryover to 2023 $0 net gain or loss; $4,500 long-term capital loss carryover to 2023 $3,000 net short-term capital loss; $1,500 short-term capital loss carryover to 2023
$3,000 net long-term capital loss; $1,500 long-term capital loss carryover to 2023 If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. When stocks and bonds are bought on a securities market, the holding period begins on the day after the trading date that the taxpayer bought the security and it ends on the trading date that the taxpayer sold the security (Publication 550, page 53). In this case, the ABC stock transaction is a gain of $500, which is the difference between the selling price of $1,500 (10 shares × $150) and adjusted basis of $1,000 (10 shares × $100). Moreover, the gain is short term because it was held for less than 1 year (bought on February 1 and sold on September 9 of the same year). Secondly, the PDQ stock produces a loss of $5,000, which is the difference between the selling price of $5,000 (100 shares × $50) and adjusted basis of $10,000 (100 shares × $100). Moreover, the loss is long-term because the stock was held for more than 1 year (bought on February 1 of 1 year and sold on June 1 of the following year). Pages 64 to 67 of Publication 550 discuss the reporting of gains and losses. In particular, if a taxpayer's capital losses are more than the capital gains, the taxpayer can claim a capital loss deduction, which is reported on Form 1040 or Form 1040-SR and enclosed in parentheses. The capital loss deduction, however, has an annual limit that is the lesser of: $3,000 ($1,500 if you are married and file a separate return) or the taxpayer's total net loss as shown on line 16 of Schedule D. In this case, Zack has a net long-term capital loss of $4,500 ($5,000 − $500) for the year. Zack would claim the annual limit of $3,000 as a net long-term capital loss and would carry forward the remaining $1,500 long-term capital loss to the following year. Publication 550, page 53 and 64-67
Harry purchased one share of common stock in a computer company for $90. Shortly after he purchased it, the corporation distributed two new shares of common stock for each share held. What is his basis for each of the three shares of common stock? $90 $180 $30 $0
$30 Distributions by a corporation of its own stock are commonly known as stock dividends. Generally, stock dividends are not taxable and therefore are not reportable (Publication 550, page 21). The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 550, page 20). In this problem, the basis in the computer corporation's stock prior to the stock dividend is $90. The distribution of the two additional shares results in Harry owning three shares of the stock with a basis of $30 per share ($90 ÷ 3 shares). Publication 550, pages 20-21
John is a furniture maker and carpenter. He makes half of his income as an employee of Concept Designs, Inc., a fine furniture manufacturing corporation. John makes the other half of his income from a personal business where he purchases, renovates, and then resells houses. In January 2022, John purchased a house that is not his residence for $50,000. He spends $10,000 in materials renovating the house, which he sells in November 2022 for $90,000. What is the amount and character of John's gain from this transaction? $20,000 ordinary gain $30,000 short-term capital gain $30,000 ordinary gain $20,000 short-term capital gain
$30,000 ordinary gain Publication 550, page 43, provides that the gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In this case, John has a gain on the sale of the property of $30,000, which is the difference between the selling price of $90,000 and the adjusted basis of $60,000 ($50,000 purchase price plus $10,000 renovation costs). The next issue is to determine the character of the gain; is it capital or ordinary? Generally, a sale or trade of a capital asset (defined below) results in a capital gain or loss. A sale or trade of a noncapital asset generally results in ordinary gain or loss. For the most part, everything you own and use for personal purposes, pleasure, or investment is a capital asset. A noncapital asset, on the other hand, is property that is not a capital asset. The following kinds of property are not capital assets: property held mainly for sale to customers or property that will physically become part of merchandise for sale to customers. This includes stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. (Publication 550, page 49) As given above, John sells property that is held mainly for sale to customers in his trade or business, which means the gain of $30,000 is treated as ordinary income. Publication 550, pages 43 and 49
In 2017, Ralph received 10 shares of White Corporation stock as a gift from his father. Ralph's father had originally paid $10 per share for this stock. The stock was trading for $20 per share at the time of the gift. In 2020, Ralph purchased an additional 20 shares of White Corporation stock for a price of $30 per share. Ralph was charged a $20 transaction fee on this purchase. In October 2022, Ralph sold 20 shares of his White Corporation stock. Ralph cannot adequately identify the shares he disposed of. What is Ralph's basis in the White Corporation shares he still owns? $100 $200 $310 $360
$310 The basis of stocks or bonds is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. If stocks are not acquired through direct purchase, the basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. Moreover, adjustments must be made to the basis for certain events that occur after purchase. (Publication 550, page 40) If the fair market value of gifted property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, the basis for gain or loss on the sale of the property is the donor's adjusted basis (plus or minus any adjustments to basis during the period the property is held by the donee). Therefore, Ralph's basis in the shares gifted from his father is the same as his father's basis: $10 per share. (Publication 550, pages 39-40) If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first (i.e., first-in, first-out) (Publication 550, page 40). As a result, Ralph's basis in the White Corporation shares he still owns is $310, calculated as: Basis in 10 shares $100 ($10 x 10)Basis in 20 shares $620 (($30 x 20) + 20), which is 620/20=$31/share Sold 20 shares10 shares at $10/sh (100)10 shares at $31/sh (310)Remaining $310 Publication 550, pages 39-40
The owner of unimproved land with a basis of $40,000 sold the property for $100,000 in 2020. The seller accepted a note for the entire $100,000 sales price. In 2022, when the buyer still owed $10,000, the note was sold for $9,000 cash. How should the disposition of the note be reported on the seller's 2022 return? $5,000 capital gain $5,000 ordinary income $2,000 capital gain $1,000 capital loss
$5,000 capital gain Publication 537, page 12, provides the general rules for the disposition of an installment obligation. In general, a disposition includes a sale, exchange, cancellation, bequest, distribution, or transmission of an installment obligation. An installment obligation is the buyer's note, deed of trust, or other evidence that the buyer will make future payments to the taxpayer. If the taxpayer is using the installment method and he or she disposes of the installment obligation, generally the taxpayer will have a gain or loss to report. If the original installment sale produced ordinary income, the disposition of the obligation results in ordinary income or loss. Likewise, if the original installment sale produced capital income, the disposition of the obligation results in capital gain or loss. Two sets of rules are provided in Publication 537 to compute the gain or loss. The first set is used to figure the gain or loss from the disposition of an installment obligation if the taxpayer sells or exchanges the obligation, or accepts less than face value in satisfaction of the obligation. In this case, the gain or loss is the difference between the taxpayer's basis in the obligation and the amount realized. The second set is used to figure the gain or loss from the disposition of the obligation in any other way. That is, the taxpayer's gain or loss is the difference between the basis in the obligation and its FMV at the time of the disposition. In this case, the owner uses the first set of rules. The owner has a capital gain of $5,000, which is the amount realized of $9,000 less the basis in the note. In this case, the basis is $4,000 (40% of the $10,000 note). Since the gross profit percentage is 60% (($100,000 - $40,000) ÷ $100,000), then the basis must be 40%, which is 100% − 60%. Publication 537, page 12
Yasmin purchased 50 shares of Tele Company stock on February 6, 2022, at $20 a share. She sold all 50 shares on February 23, 2022, for $15 a share. Later on the same day, she repurchased 40 shares of Tele Company stock at $16 per share. With only the information provided, what is Yasmin's net capital loss that she can deduct on her 2022 return? $250 net capital loss $640 net capital loss $750 net capital loss $50 net capital loss
$50 net capital loss Publication 550, pages 56-57, discusses the treatment of property transactions that are known as a wash sale. In general, a taxpayer cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when a taxpayer sells or trades stock or securities at a loss and within 30 days before or after the sale whereby the taxpayer or spouse: buys substantially identical stock or securities, acquires substantially identical stock or securities in a fully taxable trade acquires a contract or option to buy substantially identical stock or securities, or acquires substantially identical stock or securities for the taxpayer's IRA or Roth IRA. Furthermore, if a taxpayer sells stock and the taxpayer's spouse or a corporation controlled by the taxpayer buys substantially identical stock, the taxpayer has a wash sale. In the case of a wash sale, the disallowed loss is added to the cost of the new stock or securities. The adjustment postpones the loss deduction until the disposition of the new stock or securities. Furthermore, the taxpayer's holding period for the new stock or securities includes the holding period of the stock or securities sold. Publication 550, pages 56-57, provides, in part, that if the number of shares of substantially identical stock or securities repurchased within the 30 days before or after the sale is either more or less than the number of shares sold by the taxpayer, the taxpayer must determine the particular shares to which the wash sale rules apply. This determination is done by matching the shares bought with an equal number of the shares sold. The shares bought must be matched in the same order that the taxpayer bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules. A taxpayer bought 100 shares of M stock on September 21, 2021. On February 1, 2022, the taxpayer sold those shares at a $1,000 loss. On each of the 4 days from February 5, 2021, to February 8, 2022, the taxpayer bought 50 shares of substantially identical stock. As a result of the wash sale rules, the taxpayer cannot deduct the $1,000 loss. Rather, the taxpayer must add half the disallowed loss ($500) to the
Yasmin purchased 50 shares of Tele Company stock on February 6, 2022, at $20 a share. She sold all 50 shares on February 23, 2022, for $15 a share. Later on the same day, she repurchased 40 shares of Tele Company stock at $16 per share. With only the information provided, what is Yasmin's net capital loss that she can deduct on her 2022 return? $250 net capital loss $640 net capital loss $750 net capital loss $50 net capital loss
$50 net capital loss 20*50=1000 15*50=750 100-750=250 50-40=10 10*20=200 250-200=50 Publication 550, pages 56-57, discusses the treatment of property transactions that are known as a wash sale. In general, a taxpayer cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when a taxpayer sells or trades stock or securities at a loss and within 30 days before or after the sale whereby the taxpayer or spouse: buys substantially identical stock or securities, acquires substantially identical stock or securities in a fully taxable trade acquires a contract or option to buy substantially identical stock or securities, or acquires substantially identical stock or securities for the taxpayer's IRA or Roth IRA. Furthermore, if a taxpayer sells stock and the taxpayer's spouse or a corporation controlled by the taxpayer buys substantially identical stock, the taxpayer has a wash sale. In the case of a wash sale, the disallowed loss is added to the cost of the new stock or securities. The adjustment postpones the loss deduction until the disposition of the new stock or securities. Furthermore, the taxpayer's holding period for the new stock or securities includes the holding period of the stock or securities sold. Publication 550, pages 56-57, provides, in part, that if the number of shares of substantially identical stock or securities repurchased within the 30 days before or after the sale is either more or less than the number of shares sold by the taxpayer, the taxpayer must determine the particular shares to which the wash sale rules apply. This determination is done by matching the shares bought with an equal number of the shares sold. The shares bought must be matched in the same order that the taxpayer bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.
When Fred loaned $2,000 to his brother in 2021, his brother signed a note and made monthly payments until he was injured in an accident in March 2022. Fred is still owed $500 and his brother, who is no longer able to work, has declared bankruptcy. Fred had also guaranteed his brother's bank loan as a favor to his brother and was required to pay off the $800 loan balance. Fred, a cash method taxpayer, is also owed $500 rent by a former tenant. How much bad debt deduction can Fred take on his 2022 return? $1,800 $500 $1,000 $1,300
$500 Publication 550, page 54, provides that if someone owes the taxpayer money that cannot be collected, the taxpayer has a bad debt. In such a case, the taxpayer may be able to deduct the amount owed to him or her when the person figures their tax for the year that the debt becomes worthless. Bad debts that a person receives and did not arise in the course of operating a trade or business by the taxpayer are nonbusiness bad debts and are deductible as short-term capital losses. To be deductible, nonbusiness bad debts must be totally worthless; a partly worthless nonbusiness debt cannot be deducted. A debt must be genuine for the taxpayer to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. In this case, it appears that the debt was an enforceable contract since Fred's brother signed a note with monthly payments. Hence the $500 remaining balance is treated as a bad debt. To deduct a bad debt, a taxpayer must have a basis in it; that is, the taxpayer must have included the amount in income or loaned the amount out in cash. A cash basis taxpayer generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items. Since Fred is a cash basis taxpayer, he has not recognized the rent as income yet; hence, there is no bad debt to be recognized. In this case, Fred is able to claim a nonbusiness bad debt of $500 that resulted from his brother's failure to pay the borrowed funds after declaring bankruptcy. The loss attributable to the former tenant is not deductible since the rent was not claimed as income. Publication 550, page 54 error_outline First Time Score
Milton spent $70,000 for a building that he used in his business. He made improvements at a cost of $20,000 and deducted depreciation of $10,000. He sold the building for $100,000 cash, and received property having a fair market value of $20,000. The buyer assumed Milton's real estate taxes of $3,000 and a mortgage of $17,000 on the building. Selling expenses were $4,000. The gain on the sale is: $10,000. $56,000. $40,000. $52,000.
$56,000. Pursuant to Publication 550, pages 43 and 44, the gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. If the amount realized from a sale or trade is more than the adjusted basis of the property the taxpayer transferred, the difference is a gain, and If the adjusted basis of the property transferred is more than the amount realized, the difference is a loss. The adjusted basis of property is the original cost or other original basis properly adjusted (increased or decreased) for certain items. See chapter Publication 551, pages 4 through 7, for more information about determining the adjusted basis of property. The amount realized from a sale or trade of property is everything received for the property. This includes the money received plus the fair market value of any property or services received. In this problem, Milton has an adjusted basis of $80,000, which is the cost of $70,000 plus the improvements of $20,000 less the depreciation of $10,000. The amount realized is $136,000, which is the cash of $100,000 plus the property with an FMV of $20,000, plus the taxes paid by the buyer of $3,000, plus the assumed mortgage by the buyer of $17,000, less the selling expenses of $4,000. As a result, the gain on the sale is $56,000 ($136,000 − $80,000). Publication 550, pages 43-44 Publication 551, pages 4-7 Increases to Basis Capital improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessment for local improvements: Water connections Sidewalks Roads Casualty losses: Restoring damaged property Legal fees: Cost of defending and perfecting a title Zoning costs Decreases to Basis Exclusion from income of subsidies for energy conservation measures Casualty or theft loss deductions and insurance reimbursements Vehicle credits Assessment for Local improvements: 179 deduction Depreciation Nontaxable corporate distributions
You sold a residential lot 2 years ago and reported the $20,000 capital gain on the installment method. In the 3rd year of payments, the buyer defaulted and you had to repossess the lot. In the 1st year you reported $5,000 ($10,000 × 50%) and $3,000 ($6,000 × 50%) in the 2nd year. No payments were received in the 3rd year and you spent $2,500 in legal fees to repossess the property. What is the taxable gain you must report on the repossession? $0 $9,500 $8,000 $4,000
$8,000 When a taxpayer repossesses property after making an installment sale, the taxpayer must figure the following amounts: gain (or loss) on the repossession and basis in the repossessed property. The rules for figuring these amounts depend on the kind of property repossessed. The rules for repossessions of personal property differ from those for real property. In addition, special rules may apply if the taxpayer repossesses property that was the taxpayer's main home before the sale. (Publication 537, page 12) The rules for the repossession of real property allow the taxpayer to keep essentially the same adjusted basis in the repossessed property the taxpayer had before the original sale. That is, the taxpayer can recover this entire adjusted basis when the property is resold. This, in effect, cancels out the tax treatment that applied to the taxpayer on the original sale and puts the taxpayer in the same tax position as before the sale. (Publication 537, pages 13-14) Publication 537, page 14, provides Worksheet D, which is used to calculate the gain or loss resulting from repossession: 1. Total payments received before repossession $16,000 2. Total gain already reported as income 8,000 3. Difference between items 1 and 2 8,000 4. Gross profit on the original sale 20,000 5. Cost of repossession 2,500 6. Sum of items 2 and 5 10,500 7. Difference between items 6 and 4 9,500 8. Lesser of items 3 and 7 is the taxable gain 8,000 As a result of the repossession, the taxpayer in this problem would report an $8,000 gain on the repossession.
You sold a residential lot 2 years ago and reported the $20,000 capital gain on the installment method. In the 3rd year of payments, the buyer defaulted and you had to repossess the lot. In the 1st year you reported $5,000 ($10,000 × 50%) and $3,000 ($6,000 × 50%) in the 2nd year. No payments were received in the 3rd year and you spent $2,500 in legal fees to repossess the property. What is the taxable gain you must report on the repossession? $0 $9,500 $8,000 $4,000
$8,000 When a taxpayer repossesses property after making an installment sale, the taxpayer must figure the following amounts: gain (or loss) on the repossession and basis in the repossessed property. The rules for figuring these amounts depend on the kind of property repossessed. The rules for repossessions of personal property differ from those for real property. In addition, special rules may apply if the taxpayer repossesses property that was the taxpayer's main home before the sale. (Publication 537, page 12) The rules for the repossession of real property allow the taxpayer to keep essentially the same adjusted basis in the repossessed property the taxpayer had before the original sale. That is, the taxpayer can recover this entire adjusted basis when the property is resold. This, in effect, cancels out the tax treatment that applied to the taxpayer on the original sale and puts the taxpayer in the same tax position as before the sale. (Publication 537, pages 13-14) Publication 537, page 14, provides Worksheet D, which is used to calculate the gain or loss resulting from repossession: 1. Total payments received before repossession $16,000 2. Total gain already reported as income 8,000 3. Difference between items 1 and 2 8,000 4. Gross profit on the original sale 20,000 5. Cost of repossession 2,500 6. Sum of items 2 and 5 10,500 7. Difference between items 6 and 4 9,500 8. Lesser of items 3 and 7 is the taxable gain 8,000 As a result of the repossession, the taxpayer in this problem would report an $8,000 gain on the repossession. Publication 537, pages 12-14
In 2018, Mr. Chang purchased 50 shares of common stock in Corporation D for $1,000. In 2020, Corporation D declared a stock dividend of 2 shares of its common stock for each 10 shares held. In 2022, D's common stock split 2-for-1 at a time when the fair market value was $20 a share. What is Mr. Chang's basis in each of his shares of D's stock (rounded to the nearest dollar) if both distributions were tax-free and all the stock received was identical to the stock purchased?
$8.33 per share 50*20=1000 50/10=5*2=10 50+10=60 60*2=120 1000/120=8.333 Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as stock options) are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable and therefore are not reportable. (Publication 550, page 21) The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 550, page 21). In this problem, Mr. Chang's basis in Corporation D stock prior to the stock dividend is $1,000 (50 shares × $20 per share). As a result of the first stock dividend of 2 shares for every 10 shares held, Mr. Chang receives 10 additional shares of stock (50 shares ÷ 10 = 5, which is multiplied by 2 for 10 additional shares). The basis of the stock after the stock dividend is reduced to $16.67 per share ($1,000 ÷ 60 shares). In 2018, the stock split doubles the number of shares held to 120 shares (60 × 2) and likewise splits the adjusted basis to $8.33 per share ($16.67 ÷ 2 or $1,000 ÷ 120 shares).
You incurred the following expenditures in connection with your rental property. Which of them should be capitalized? New roof Install new cabinets Pave driveway All of the answer choices are correct.
All of the answer choices are correct. Page 5 of Publication 527 states, in part, improvements add to the value of the property, prolong its useful life, or adapt it to new uses. (See also page 5 of Publication 527 for examples of increases to basis.) Improvements include: putting a recreation room in an unfinished basement, adding a bathroom or bedroom, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, and paving an unpaved driveway. If a taxpayer makes improvements to the property, the cost of the improvement must be capitalized and depreciated as if the improvement were separate property. Publication 527, page 5
Emily bought 50 shares of stock in 2020 for $500. In 2021, she received a return of capital of $100. She received an additional return of capital of $50 in 2022. What must Emily report as long-term capital gain on her tax return for 2022? $150 $50 $100 $0
0 A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. The taxpayer should receive a Form 1099-DIV showing the nondividend distribution (also referred to as a nontaxable distribution). A nondividend distribution is treated as a return of capital; it reduces the basis of the taxpayer's stock. Hence, it is not taxed at the time received but rather when the stock is sold. Moreover, return of capital distributions continue to be nontaxable until the taxpayer's basis in the stock is fully recovered. Once the basis is reduced to zero, any additional return of capital that is received by the taxpayer is treated as a capital gain. The reporting of the capital gain as long-term or short-term capital gain depends on how long the taxpayer held the stock. See Publication 550, page 20, for more discussion of this topic. In this case, the return of capital amounts of $150 ($100 and $50) is less than the adjusted basis ($500) that Emily has in the stock. Hence, Emily has no taxable income and her basis is reduced to $350 after the return of capital. Publication 550, page 20
Alf owns all of the shares of Waxman Corporation, a manufacturer of finished leather products. Alf also owns a 60% partnership interest and his friend Richard owns a 40% partnership interest in York Real Estate Rentals, LLC. York Real Estate Rentals owns and leases warehouse space to numerous businesses. In 2022, York Real Estate Rentals sold a building with an adjusted basis of $100,000 to Waxman Corporation for $80,000. What is the amount of York Real Estate Rentals' deductible loss in 2022 from this transaction? $(20,000) $(12,000) $(8,000) $0
0 Publication 550, page 48, provides that a taxpayer cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between the taxpayer and the following related parties: Members of the taxpayer's family, which include only the taxpayer's brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.) A partnership in which the taxpayer directly or indirectly owns more than 50% of the capital interest or the profits interest A corporation in which the taxpayer directly or indirectly owns more than 50% in value of the outstanding stock A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by the taxpayer or by a member of the taxpayer's family, whether or not this control is legally enforceable Since Alf owns more than 50% in both the partnership and the corporation that are exchanging the asset, no loss can be deducted. Publication 550, page 48
Darryl received several acres of land from his father as a gift. At the time of the gift, the land had a fair market value of $85,000. The father's adjusted basis in the land was $105,000. Two years later, Darryl sold the land for $90,000. No events occurred that increased or decreased Darryl's basis in the land. What was Darryl's gain or (loss) on the sale of the land? $(15,000) $5,000 $20,000 $0
0 The basis of property received as a gift requires the recipient to know the property's adjusted basis to the donor, fair market value (FMV), and any gift tax paid by the donor. Once this information is known, the gain or loss on a sale or trade of the gifted property is found by comparing the amount realized with the adjusted basis of the property. Publication 551, page 9, states, in part, that if the FMV of the property received from a donor was less than the donor's adjusted basis, the taxpayer's basis for figuring: gain on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustment to basis while the taxpayer held the property, and loss on its sale or other disposition is the FMV when the taxpayer received the gift plus or minus any required adjustment to basis while he or she held the property. In other words, both the loss and gain on sale by the donee are minimized because the loss attributable to the donor at the time of the gift is lost by giving the property away. Since the gift had an FMV lower than its basis, Darryl uses the adjusted basis of the received property (i.e., $105,000) for computing the gain, which is higher than the sale price of $90,000. On the other hand, he uses the FMV of the donor (i.e., $85,000) for computing the loss, which is lower than the sale price of $90,000. Because the sale price of the property is between the FMV and the adjusted basis, Darryl does not recognize any gains or losses from the sale. Publication 551, page 9
Nature Corporation declared and distributed a stock dividend of 1 share for each 10 shares held by stockholders. Donna had 100 shares ($5.50 per share basis) and received 10 additional shares with a fair market value of $6.00 per share. Which of the following is most applicable to the stock dividend? 100 shares at $5.50 per share basis and 10 shares at zero basis per share 110 shares at $5.00 per share basis and $55 taxable income 110 shares at $5.00 per share 100 shares at $5.00 per share basis and 10 shares at $6.00 per share basis
110 shares at $5.00 per share Distributions by a corporation of its own stock are commonly known as stock dividends. Generally, stock dividends are not taxable and therefore are not reportable (Publication 550, pages 21 and 22). The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 551, page 20). In this problem, Donna's basis in Nature Corporation stock prior to the stock dividend is $550 (100 shares × $5.50 per share). As a result of the stock dividend, the basis is adjusted to $5.00 per share, which is the original basis of $550 divided by the number of shares after the dividend or 110 shares. Publication 550, pages 20-22
During 2022, Ms. Tina paid $2,000 for state income taxes to Ohio, $1,400 in general sales tax, and $1,200 in sales tax on the purchase of a motorcycle. What amount can Ms. Tina deduct as an itemized deduction on her tax return for 2022? $1,400 $2,000 $2,600 $3,200
2600 The instructions for line 5 of Schedule A (Form 1040), pages A-3 and A-4, state that the deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately). In addition, line 5a states that a taxpayer can deduct from adjusted gross income either state and local income taxes or state and local sales tax. The taxpayer cannot deduct both in the same year. In addition, a taxpayer can deduct either his or her actual expenses (which would include the sales tax paid on specific items such as a motor vehicle, boat, etc.) or an amount figured using the Optional State and Certain Local Sales Tax Tables in the instructions for Schedule A, Form 1040. If the taxpayer uses the Optional State and Certain Local Sales Tax Tables, he or she may be able to add to the table any state and local general sales tax paid on motor vehicles, motorcycles, motor homes, RVs, SUVs, trucks, vans, and off-road vehicles. (For more information, see the instructions for line 7 of the State and Local General Sales Tax Deduction Worksheet on page A-7 of the Schedule A (Form 1040) Instructions.) Ms. Tina's itemized deductions for 2022 are $2,600, which is the sum of $1,400 (general sales tax) and $1,200 (state sales tax on motorcycle purchase). Instructions for Schedule A (Form 1040), pages A-3, A-4, and A-7
Harry purchased one share of common stock in a computer company for $90. Shortly after he purchased it, the corporation distributed two new shares of common stock for each share held. What is his basis for each of the three shares of common stock? $90 $180 $30 $0
30 Distributions by a corporation of its own stock are commonly known as stock dividends. Generally, stock dividends are not taxable and therefore are not reportable (Publication 550, page 21). The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 550, page 20). In this problem, the basis in the computer corporation's stock prior to the stock dividend is $90. The distribution of the two additional shares results in Harry owning three shares of the stock with a basis of $30 per share ($90 ÷ 3 shares). Publication 550, pages 20-21
Ethel and George sold an investment property they purchased in 2014 for $300,000. The property was sold for $700,000 with a down payment of $140,000. What is the gross profit percentage? 57.14% 22.86% 28.57% None of the answer choices are correct.
57.14% In the case of an installment sale, a certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing the taxpayer's gross profit from the sale by the contract price. The gross profit percentage generally remains the same for each payment you receive. (Publication 537, page 4) To figure the adjusted basis and gross profit percentage for an installment sale, the following worksheet (see Worksheet A, Publication 537, page 3) is used: 1. Enter the selling price for the property.-----------------1._____ 2. Enter your adjusted basis for the property. 2._____ 3. Enter your selling expenses. 3._____ 4. Enter any depreciation recapture. 4._____ 5. Add lines 2, 3, and 4. This is your adjustedbasis for installment sale purposes. 5._____ 6. Subtract line 5 from line 1. If zero or less,enter -0-. 6._____ This is your gross profit.If the amount entered on line 6 is zero, Stophere. You cannot use the installment method.7. Enter the contract price for the property. 7._____ 8. Divide line 6 by line 7. This is your grossprofit percentage. ---------------------------------------------------------------8._____ In this problem, Ethel and George sell their property for $700,000 (item 1), and the property has an adjusted basis for installment sale purposes of $300,000 (items 2 and 5). Hence, the gross profit percentage is 57.14%, which is the gross profit of $400,000 ($700,000 − $300,000) divided by the selling price of $700,000.
Mildred and John (spouses) purchased 40 acres of undeveloped land in 1997 for $120,000. They paid personal real estate taxes of $50,000, which they elected to add to the property's basis. They sold the property for $600,000, having total settlement costs of $70,000. The settlement costs are allowable as an expense of sale. Mildred and John received a down payment of $100,000 with the balance to be paid over 15 years. What is their gross profit percentage? 60% 72% 68.33% 82%
60% In the case of an installment sale, a certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing the taxpayer's gross profit from the sale by the contract price. The gross profit percentage generally remains the same for each payment you receive. (Publication 537, page 4) To figure the adjusted basis and gross profit percentage for an installment sale, the following worksheet (see Publication 537, page 3) is used: 1. Enter the selling price for the property. ------------------------------------------------1._____ 2. Enter your adjusted basis for the property. ====================================2._____ 3. Enter your selling expenses. ====================================3._____ 4. Enter any depreciation recapture . ====================================4._____ 5. Add lines 2, 3, and 4. This is your adjustedbasis for installment sale purposes. -----------------------------------------------5._____ 6. Subtract line 5 from line 1. If zero or less,enter -0-. ----------------------------------------6._____ This is your gross profit.If the amount entered on line 6 is zero, Stophere. You cannot use the installment method .7. Enter the contract price for the property. -----------------------------------------------7._____ 8. Divide line 6 by line 7. This is your grossprofit percentage ----------------------------------------------------------------------------------8._____. In this problem, Mildred and John sell their property for $600,000 (item 1), and the property has an adjusted basis for installment sale purposes of $240,000, which is the sum of $170,000 (item 2) and selling expenses of $70,000 (item 3). Hence, the gross profit percentage is 60%, which is the gross profit of $360,000 ($600,000 − $170,000 − $70,000) divided by the selling price of $600,000. Publication 537, pages 3-4
Harry sold 100 acres of land that he had owned for over 30 years. His original cost was $100,000. He sold the property for $500,000 and had settlement costs of $50,000. He received a $150,000 down payment with the balance to be paid over 10 years. What is his gross profit percentage? 80% 70% 50% 60%
70% In the case of an installment sale, a certain percentage of each payment (after subtracting interest) is reported as installment sale income. This percentage is called the gross profit percentage and is figured by dividing the taxpayer's gross profit from the sale by the contract price. The gross profit percentage generally remains the same for each payment you receive. (Publication 537, page 4) To figure the adjusted basis and gross profit percentage for an installment sale, the following worksheet (see Publication 537, page 3) is used: 1. Enter the selling price for the property.---------------------------------------------------------------------------------------- 1._____ 2. Enter your adjusted basis for the property. ===================================================2._____ 3. Enter your selling expenses.======================================== 3._____ 4. Enter any depreciation recapture. ==================================================4._____ 5. Add lines 2, 3, and 4. This is your adjustedbasis for installment sale purposes. --------------------------------------------------------------------------------------------------------5._____ 6. Subtract line 5 from line 1. If zero or less,enter -0-. ------6._____ This is your gross profit.If the amount entered on line 6 is zero, Stophere. You cannot use the installment method. 7. Enter the contract price for the property. ----------------7._____ 8. Divide line 6 by line 7. This is your grossprofit percentage. ------------------------------------------------------------------8._____ In this problem, Harry sells his property for $500,000 (item 1), and the property has an adjusted basis for installment sale purposes of $150,000, which is the sum of $100,000 (item 2) and selling expenses of $50,000 (item 3). Hence, the gross profit percentage is 70%, which is the gross profit of $350,000 ($500,000 − $100,000 − $50,000) divided by the selling price of $500,000. Publication 537, pages 3-4
Jim and Jean (spouses) purchased a vacation home in 2016 for $100,000. They sold the property for $500,000 in 2022 and received a down payment of $200,000. They took a mortgage from the purchaser for the remaining $300,000. What is Jim and Jean's gross profit percentage on this sale? 40% 60% 80% None of the answer choices are correct.
80% In this problem, Jim and Jean sell their vacation house for $500,000 (item 1), and the house has an adjusted basis for installment sale purposes of $100,000 (item 2), which is the cost of the property. The couple did not make any improvements to the property. There are no selling expenses for item 3. The gross profit percentage is 80%, which is the gross profit of $400,000 ($500,000 − $100,000) divided by the selling price of $500,000. Publication 537, pages 3-4
Connor purchased Flora stock in 2016 and sold it in 2022. In 2022, he also traded in a copy machine that he had been using in his business since 2018 for a new model. On December 15, 2022, he inherited 35 shares of Fauna Laboratories stock. What is the holding period for these properties? All short term Flora stock long term, copy machine and Fauna stock short term Flora and Fauna stock long term; copy machine short term All long term
All long term The holding period for a capital asset is the length of time the property was owned before it is disposed of by sale or exchange. Holding periods are categorized as "short term" or "long term." In determining the holding period, the taxpayer begins counting on the day after the property was acquired. If a taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss is a long-term capital gain or loss. If a taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. (Publication 550, page 19) Assets that are inherited are considered to meet the long-term holding period requirements. (Publication 550, page 19) Given that Connor purchased the Flora stock in 2016 and held it until 2022, clearly more than 12 months, the holding period would be characterized as long term. The copy machine that was purchased in 2018 and held until 2022 was also held for more than 12 months; therefore, the holding period would be long term. Since the inherited shares of Fauna Laboratories stock are considered to meet the long-term holding requirements, the stock is regarded as long term, regardless when Connor sells the stock. IRC Section 1223(11) Publication 550, page 19
Cost basis of property includes: certain settlement fees and other costs. sales taxes charged on the purchase. real estate taxes paid for seller without reimbursement. All of the answer choices are correct.
All of the answer choices are correct. A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. Publication 550, page 2, states, in part, that the cost basis of property purchased by a taxpayer usually is its cost. The cost, however, includes the amount the taxpayer pays in cash, debt obligations, other property, or services. In addition, the cost includes amounts the taxpayer pays for the following items: Sales tax Freight Installation and testing Excise taxes Legal and accounting fees (when they must be capitalized) Revenue stamps Recording fees Real estate taxes (if assumed for the seller) In addition, the basis of real estate and business assets may include other items, such as settlement fees and closing costs. Publication 550, page 2
You purchased a heating, ventilating, and air conditioning (HVAC) unit for your rental property on December 15. It was delivered on December 28 and was installed and ready for use on January 2. When should the HVAC unit be considered placed in service? December 15 December 28 December 31 January 2
January 2 A taxpayer begins to depreciate property when it is placed in service in the taxpayer's trade or business or for the production of income. Likewise, a taxpayer stops depreciating it either when the taxpayer has fully recovered their cost or other basis, or when the taxpayer retires it from service, whichever happens first. Property is considered placed in service in a rental activity when it is ready and available for a specific use in that activity whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. In this problem, the HVAC is not ready for use until January 2 and as such, that is the date that it is placed in service. See Publication 527, page 6, for a review of the topic. Example On November 22 of last year, a taxpayer purchased a dishwasher for his rental property. The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. If the appliance had been ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Be aware that if the property is placed in service in a personal activity, the taxpayer cannot claim depreciation. However, if the taxpayer changes the property's use from personal to business or income-producing, then the taxpayer will be able to claim depreciation deduction. Special rules on the basis of the property do apply. Publication 527, page 6
When Amelia bought her first home in 2019, she paid $100,000 plus $1,000 closing costs. In 2020, she added a deck that cost $5,000. Then, in July 2022, a real estate dealer accepted her house as a trade-in and allowed her $125,000 (amount received as a trade-in) toward a new house priced at $200,000. How should Amelia report this transaction on her 2022 return? $19,000 long-term capital gain No reporting because the trade is not a sale $0 taxable gain and reduce her basis in her new house by $19,000 No reporting required
No reporting required The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. In the case of a personal residence that is the primary one, a special rule applies whereby the taxpayer can exclude up to $250,000 per spouse of the gain on the sale of the main home if all of the following are true (see Publication 523, pages 2 and 3): The taxpayer meets the ownership test (i.e., owned the home for at least 2 of the last 5 years). The taxpayer meets the use test (i.e., lived in the main home for at least 2 of the last 5 years). During the 2-year period ending on the date of the sale, the taxpayer did not exclude gain from the sale of another home. Be aware that there are some exceptions in this area, which are covered more thoroughly in Publication 523, pages 3 through 6. In this problem, the taxpayer satisfies the special rule for excluding $250,000. Thus, the gain from the sale is $19,000, which is the amount received as a trade-in of $125,000 less the property's basis of $106,000 ($100,000 + $5,000 + $1,000). However, since the gain of $19,000 is less than the $250,000 exclusion amount, none of it is recognized. Furthermore, the sale of a taxpayer's main home is not reported on the tax return unless the taxpayer has a gain and does not qualify to exclude all of it, the taxpayer has a gain and chooses not to exclude it, or the taxpayer received Form 1099-S (see Publication 523, page 3). Thus, Amelia does not report the sale of her main home. Publication 523, pages 2-6
How is the sale of Section 1244 (small business) stock treated for federal income tax purposes? Ordinary loss or ordinary income Ordinary loss or capital gain Ordinary income or capital loss Capital gain or capital loss
Ordinary loss or capital gain A taxpayer can deduct as an ordinary loss, rather than as a capital loss, his or her loss on the sale, trade, or worthlessness of Section 1244 stock. The loss is reported on Form 4797, line 10. Any gain on this stock is capital gain and is reported on Form 8949 if the stock is a capital asset in the taxpayer's hands (Publication 550, page 52). In addition, if the basis of the taxpayer's Section 1244 stock has increased, through contributions to capital or otherwise, the taxpayer must treat this increase as applying to stock that is not Section 1244 stock when the taxpayer figures the ordinary loss on its sale (Publication 550, page 52). As a result, the sale of Section 1244 stock can be deducted as an ordinary loss and as a capital gain if the stock is being held as a capital asset in the taxpayer's hands. For more information on losses on Section 1244 (small business) stock, see chapter 4 of Publication 550. Publication 550, pages 52-53
Sandy bought investment property on March 1, 2021, and sold it on March 1, 2022. What is the character of her gain or loss? Short term Neither short term nor long term Long term Short term or long term
Short term Pursuant to the information given in Publication 550, pages 53 and 54, the holding period for sold or traded investment property determines whether any capital gain or loss is short-term or long-term. If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. Likewise, if the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. To determine how long the taxpayer held the investment property, begin counting on the date after the day the taxpayer acquired the property (trade date, not settlement date, for securities traded on an established market). The day the taxpayer disposes of the property is part of the holding period. Note: Although this is the rule for counting days, but a simple rule is to count either the day of purchase or the date of sale but not both. In this problem, Sandy has a short-term gain or loss from the investment transaction because the property was held for 1 year or less. Publication 550, pages 53-54
Which of the following is the depreciable basis in rental property that is placed in service after receiving it as a gift, if the donor's basis was less than the fair market value of the property? The fair market value on the date of the gift plus or minus any required adjustments to basis The fair market value of the property on the date you converted it to rental property The donor's basis of the property plus or minus any required adjustments to basis All of the answer choices are correct.
The donor's basis of the property plus or minus any required adjustments to basis Publication 551, page 9, provides that if "the FMV [fair market value] of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property....If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property." See the chart below for examples of basis adjustments, which appear in Publication 551, Table 1, on page 5. Increases to Basis Capital improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Paving your driveway conditioning Rewiring your home Assessment for local improvements: Water connections Sidewalks Roads Casualty losses: Restoring damaged property Legal fees: Cost of defending and perfecting a title Zoning costs Decreases to Basis Exclusion from income of subsidies for energy conservation measures Casualty or theft loss deductions and insurance reimbursements Vehicle credits Section 179 deduction Depreciation Nontaxable corporate distributions Therefore, the depreciable basis in rental property received as a gift in this question would be the donor's basis in the property plus or minus any applicable adjustments.
Which of the following is the depreciable basis in rental property that is placed in service after receiving it as a gift, if the donor's basis was less than the fair market value of the property? The fair market value on the date of the gift plus or minus any required adjustments to basis The fair market value of the property on the date you converted it to rental property The donor's basis of the property plus or minus any required adjustments to basis All of the answer choices are correct.
The donor's basis of the property plus or minus any required adjustments to basis Therefore, the depreciable basis in rental property received as a gift in this question would be the donor's basis in the property plus or minus any applicable adjustments. IRC Section 1015(a) Therefore, the depreciable basis in rental property received as a gift in this question would be the donor's basis in the property plus or minus any applicable adjustments. IRC Section 1015(a)
Sue's father purchased 1,000 shares of ABC stock for $10 per share on December 30, 2021. Sue inherited the 1,000 shares of ABC stock from her father on September 15, 2022. The FMV at the time of the inheritance was $20 per share. On December 20, 2022, she sold the stock for $25 per share. The gain of $15,000 is short-term capital gain. The gain of $15,000 is long-term capital gain. The gain of $5,000 is long-term capital gain. The gain of $5,000 is short-term capital gain.
The gain of $5,000 is long-term capital gain. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. As provided in Publication 551, page 10, the basis of property that is received from a decedent is generally one of the following: The FMV of the property at the date of the individual's death or The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. If a federal estate tax return does not have to be filed, the taxpayer's basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Once the amount of the gain or loss is determined, the taxpayer must determine whether it is long term or short term. If the investment property is held for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the property is held for 1 year or less, any capital gain or loss is a short-term capital gain or loss. When investment property is inherited, the capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss. This is true regardless of how long the taxpayer actually held the property. (Publication 551, page 10) In this problem, the gain on the sale for Sue is long-term capital gains and it equals $5,000, which is the selling price of $25,000 ($25 × 1,000 shares) less the adjusted basis of $20,000 ($20 × 1,000 shares). Publication 551, page 10
Emma's brother purchased 100 shares of Clockwork, Inc. stock for $10 per share on December 30, 2021. Emma inherited the shares of Clockwork stock from her brother on September 15, 2022, when it had a fair market value of $15 per share. On December 20, 2022, she sold the stock for $20 per share. What is the amount and character of her gain? The gain of $1,000 is short-term capital gain. The gain of $1,000 is long-term capital gain. The gain of $500 is long-term capital gain. The gain of $500 is short-term capital gain.
The gain of $500 is long-term capital gain. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. As provided in Publication 551, pages 9-10, the basis of property that is received from a decedent is generally one of the following: The fair market value (FMV) of the property at the date of the individual's death, The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation, The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes, or The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. If a federal estate tax return does not have to be filed, the taxpayer's basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Once the amount of the gain or loss is determined, the taxpayer must determine whether it is long term or short term. If the investment property is held for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the property is held for 1 year or less, any capital gain or loss is a short-term capital gain or loss. When investment property is inherited, the capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss. This is true regardless of how long the taxpayer actually held the property. (Publication 550, page 40) In this problem, the gain on the sale for Emma is long-term capital gains and it equals $500, which is the selling price of $2,000 ($20 × 100 shares) less the adjusted basis of $1,500 ($15 × 100 shares). Publication 551, pages 9-10 Publication 550, page 40
What is an individual's basis in inherited property if a federal estate tax return does not have to be filed? The property's alternate valuation date The property's adjusted basis to the decedent at the date of death The property's fair market value at the date of death The property's adjusted basis to the decedent at the date of death or the property's alternate valuation date
The property's fair market value at the date of death Publication 551, pages 9 and 10, states, in part, that a taxpayer's basis in property that he or she inherits is usually its fair market value (FMV) at the date of the decedent's death. If a federal estate tax return (Form 706) has to be filed, the taxpayer's basis in the inherited property can be its FMV at the alternate valuation date if the estate qualifies and the personal representative elects to use alternate valuation. Hence, this valuation date can be elected only if an estate tax return is being filed. If a federal estate tax return does not have to be filed, then the taxpayer's basis in the property is its appraised value at the date of death for state inheritance or transmission taxes. The FMV (not the adjusted basis) at the date of death of the decedent is usually the basis for inherited property. It does not matter if an estate tax return is required to be filed or not. The property's alternate valuation date is relevant only if the personal representative makes such an election and, if so, an estate tax return is being filed. Publication 551, pages 9-10
Yousef and Ramina (spouses) purchased 10 shares of stocks in Yam Company on August 31, 2021, for $850. They sold 25 shares of stock in Tray Company for $900 on April 10, 2022. They had purchased the 25 Tray Company shares in 2011 for $100. They also sold 20 shares of stock of Delta Company on December 1, 2022, for $500. They had purchased the 20 Delta Company shares in 2020 for $4,500. Yousef and Ramina's taxable income on their joint 2022 return was $33,000 before these stock transactions. Assume that Yousef and Ramina had no other capital transactions in 2022. What is Yousef and Ramina's currently deductible capital loss for 2022 and what is their capital loss carryover to the next year? They can deduct $3,200 in long-term capital loss and carry over a capital loss of $800. They can deduct $4,000 in long-term capital loss. They can deduct $3,000 in long-term capital loss and carry over a capital loss of $200. They can deduct $500 in long-term capital loss.
They can deduct $3,000 in long-term capital loss and carry over a capital loss of $200. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property (Publication 550, page 43): If the amount realized from a sale or trade is more than the adjusted basis of the property that the taxpayer transfers, the difference is a gain. If the adjusted basis of the property that the taxpayer transfers is more than the amount realized, the difference is a loss. If a taxpayer's capital losses exceed the capital gains, the taxpayer can claim a capital loss deduction (not a basis reduction). However, it should be remembered that the allowable capital loss deduction is the lesser of (1) $3,000 ($1,500 if married and filing a separate return) or (2) the total net loss. See Publication 550, pages 66-67, for more details on this topic. Yousef and Ramina have a $4,000 ($500 − $4,500) long-term capital loss from the Delta stock sale and an $800 ($900 − $100) long-term capital gain from the Tray stock sale. As a result, the total capital loss for 2020 is $3,200 ($4,000 − $800), which is deductible as $3,000 in long-term capital loss and a capital loss carryover of $200. Publication 550, pages 43 and 66-67
Tom, a single taxpayer, determines that he has both a short-term capital loss of $2,000 and a nondividend distribution of $1,000 from an investment. The following statements are correct, except: the basis of the investment is reduced by the nondividend distribution. nondividend distribution is a return of capital. the short-term capital loss can be used to offset capital gains (if any) for the year. any unused short-term capital loss may be carried back 3 years.
any unused short-term capital loss may be carried back 3 years. This question deals with several different issues. First, IRC Section 1(h)(1) and IRC Section 1222 provide specific netting procedures for calculating capital gains and losses. When a taxpayer has a loss from the sale of short-term assets, the loss will first be applied against short-term capital gains, if any, and then, the remaining "net" short-term loss is used to offset any "net" long-term capital gains. Additionally, a taxpayer may carry over net capital losses to future years until the loss is fully utilized (Publication 550, pages 64-67). Next, nondividend distributions received by a taxpayer are not treated the same as ordinary dividends or capital gain distributions. Non-dividend distributions consist of return of capital because they are not paid out of earnings and profits. Distributions that are a return of capital are nontaxable distributions that reduce the basis of the investment by the amount of the distribution (Publication 550, page 20). IRC Section 1(h)(1), IRC Section 1222, Notice 97-59, and Notice 2004-39 Publication 550, pages 20 and 64-67
Generally, if you own stock in a small corporation that meets the requirements of Section 1244 (small business) stock and you sell that stock at a loss, the loss is reported as: short-term loss on Form 8949 limited to $3,000. ordinary loss on Form 4797 limited to $25,000 for a single individual and limited to $50,000 for those filing a joint return. long-term loss on Form 8949 limited to $3,000. ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return.
ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return. If a taxpayer sustains a loss on the sale, exchange, or worthlessness of small corporation stock that meets the requirements of Section 1244, they may take an ordinary loss deduction. The taxpayer would report the loss on Form 4797, line 10. Any loss in excess of the amounts described in the "Ordinary Loss Limit" paragraph of Publication 550 (page 52) is reported on Form 8949. As discussed in the "Ordinary Loss Limit" paragraph, the maximum deduction permitted for such losses is $50,000 ($100,000 married filing jointly even if only one spouse has this type of loss). The loss is reported on line 10 on Form 4797. In the case where the taxpayer has a loss of $110,000 and the taxpayer's spouse has no loss, the taxpayer is able to take a loss of $100,000 on a joint return. Any losses in excess of the $50,000 ($100,000 married filing jointly) are reported as capital losses. IRC Section 1244 Publication 550, page 52
Juan purchased two shares of common stocks in 2022 in a company that markets biotech products. Juan paid $90 for one share and paid $110 for the next share. Later that year, the company declared a 2-for-1 common stock split. Juan's new basis in the stock shares is: average of the four shares at $50 a share. two shares at $90 a share and two shares at $110 a share. four shares at $200 a share. two shares at $45 a share and two shares at $55 a share.
two shares at $45 a share and two shares at $55 a share. Distributions by a corporation of its own stock are commonly known as stock dividends. Generally, stock dividends are not taxable and therefore are not reportable. (Publication 550, page 22) The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital. (Publication 550, pages 40-41) In this problem, Mr. Juan's basis in the company's stock prior to the stock split is $200 ($90 for one share and $110 for the next share). As a result of the 2-for-1 stock split, Mr. Juan has four shares of stock and the basis in the stock is two shares at $45/share and two shares at $55/share. Publication 550, pages 22 and 40-41
All of the following are requirements to claim head of household filing status, except: you are unmarried or considered unmarried on the last day of the year. your spouse did not live in your home during the last 6 months of the tax year. your parent must live in your home at least 6 months. you paid more than half of the cost of keeping up your house for the entire year.
your parent must live in your home at least 6 months. To qualify as head of household, a taxpayer must meet all of the following requirements: unmarried or considered unmarried (generally, the taxpayer's spouse did not live in the taxpayer's home during the last 6 months of the tax year) on the last day of the year, paid more than half the cost of keeping up a home for the year, and a qualifying person lived with the taxpayer in the home for more than half the year (except for temporary absences, such as school). There is another exception to qualifying as head of household; a taxpayer's dependent parents do not need to live with the taxpayer. Thus, in this question, all of the responses are correct except the one stating that the taxpayer's parent must live in the taxpayer's home. Publication 17, page 23-24
