Chapter 11 Learnsmart

What refers to boot?

- Boot refers to any property involved in the exchange that is not-like-kind property - If a seller assumes the liability of a buyer in an exchange, the amount of the liability is considered to be boot.

Types of property that are ineligble for like-kind treatment

-Equipment used in a trade or business, land held outside the US.; Partnership interests; inventory held for resale; stocks and bonds held for investment.

What describes the tax treatment of capital losses as they apply to corporate taxpayers ?

-No offset against ordinary income -Can be used to fully offset capital gains -Net capital losses carried back 3 years and forward 5 years

Which are not 1231 assets?

-Personal use property held for more than a year -Investment property held more than 1 year

What types of real property will qualify as like-kind property

-Real property held for investment. -Real property used in a trade or business

Depreciable assets and land used in a trade or business (including rental property) held by a taxpayer for more than 1 year is referred to as Section __ assets

1231

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

20 % of the lesser of the recognized gain or the A/D

What is meant by an indirect conversion when referring to involuntary conversion?

An indirect conversion occurs when a taxpayer receives a cash settlement to use toward replacing involuntarily converted property.

Long-term Capital

Asset held for investment or used personally, held more than 1 year

Section 1231

Asset used in trade or business held more than 1 year

Ordinary Asset

Asset used in trade or business, held one year or less

What is not correct regarding boot?

Boot received will trigger the recognition of a loss in a like-kind exchange

What is correct concerning the property involved in a like-kind exchange?

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

Losses resulting from involuntary conversions of business property are deductible immediately as __

Casualty; losses

What is not considered to be an ordinary asset?

Corporate stock in taxpayer's investment portfolio

Capital Loss

Deductibility is subject to certain restrictions against certain types of income

A ___ involves a taxpayer receiving a property replacement for the involuntarily converted property.

Direct Conversion

Ordinary Loss

Fully deductible against all types of income

Preferential rate - 28%

Gain on collectibles held more than a year

What is incorrect when referring to installment sales?

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

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

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

Involves the taxpayer receiving a cash settlement to use toward replacing the involuntarily converted property.

Indirect Conversion

Gain on the sales of marketable securities and inventory, or any gain that is due to Sec 1245 depreciation recapture is ineligible for recognition under the __ method

Installment

An___ ___ is any sale of property where the seller receives at least one payment in a taxable year subsequent to the year of disposition of the property

Installment sale

A third-party intermediary can facilitate a like-kind exchange. The taxpayer transfers the like-kind property to the ___ who then sells the property and purchased like-kind property to transfers to the ___

Intermediary; taxpayer

What is not considered to be a capital asset?

Inventory in taxpayer's business

When property is partially or wholly destroyed by a natural disaster or accident, stolen, condemned, or seized via eminent domian by a government agency, the loss of property is referred to as __

Involuntary Conversion

Pure Sec 1231

Land

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

Land is not subject to depreciation

Generally, the taxpayer is NOT allowed to offset boot received with boot paid. However, when the taxpayer gives and receives boot in the form of __, the taxpayer is allowed to net the boot received with the boot paid

Liabilities

A ___ results in taxpayers being able to trade assets and defer the recognition of the gain or loss to a future period in a subsequent transaction

Like-kind exchange

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

Loss

Capital Gain

May be taxed at favorable (less than marginal) rates

Preferential rate - 15%

Most capital gains, such as gains on stocks and bonds

Which of the following statements is correct regarding the sale of Section 1231 assets?

Net Section 1231 losses are fully deductible against all types of income

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

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

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

None of the gain will be taxed as ordinary income

When a taxpayer sells property to a related party and the property is depreciable property to the buyer, the gain on the sale is characterized as ___

Ordinary Income

All gains and losses are eventually characterized as either __ or __ gains or losses

Ordinary or capital

Section 1245

Personal Property

Process of netting Section 1231 gains and losses (Step 1)

Re-characterize all or part of Sec. 1231 gains as ordinary income under Sec. 1245, 291, or 1239 rules

Best describes the process of netting Sec. 1231 gains and losses ?

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

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

Recognized

What is true regarding gains and losses?

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

The amount of Section 1245 depreciation that will be taxed as ordinary income is the lesser of the___ gain on sale or total ___ on the asset

Recognized; Accumulated Deprecation

In order to defer the gain on an involuntary conversion, the tax payer must reinvest the amount of the ___ from the conversion into replacement property within the prescribed time limit.

Reimbursement

For both personal and real property, qualified __ property for an involuntary conversion must be similar and related in service or use to the property that was involuntarily converted.

Replacement

What is incorrect regarding the treatment of gains and losses?

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

Ordinary Gain

Taxed at regular, marginal rates

In a direct conversion, if a taxpayer defers the recognized gain on the exchange of property, the adjusted basis in the property received is equal to the __

Taxpayer's basis in the property involuntarily converted

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

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

When an installment sale involves Sec 1245 depreciation recapture, how is the gain recognized?

The portion of gain due to recapture is recognized immediately. Any remaining Sec. 1231 gain can be recognized on the installment method.

When a taxpayer engages in a qualified like-kind exchange, how is the gain/loss on the exchange treated?

The recognition of the gain or loss is deferred and taxed in a subsequent transaction

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

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

In the event where a taxpayer cannot find another party willing to exchange properties, the taxpayer may engage a ___-___ intermediary the exchange.

Third- party

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

True

Preferential rate - 25%

Unrecaptured Sec. 1250 gains

Process of netting Section 1231 gains and losses (Step 3)

Use net Sec. 1231 loss to offset ordinary income, or, if a gain, apply the Sec. 1231 look-back rule to determine character of gains

The recapture of depreciation changes the character of the gain on a Section 1231 asset from __ gain to __ income

capital, ordinary

Section 1250

depreciable real property used in a trade or business

Of all Section 1231 asset used in a trade or business, only__ is a pure Sec. 1231 asset because it is not a __ asset

land; depreciable

Taxpayers meeting the involuntary conversion requirements may elect to either __ or __ the realized gain on the conversion

recognize; defer

In a direct conversion, where a taxpayer defers the recognition of gain on the exchange of property, the adjusted basis in the property received is equal to the __ __ of the property involuntarily converted.

taxpayers's basis

Short-term Capital

Asset held for investment or used personally, held for one year or less

Process of netting Section 1231 gains and losses (Step 2)

Combine Section 1231 gains and losses

What describes the tax treatment of capital losses as they apply to individuals?

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