Gains & Losses
When does the holding period for a purchased asset end? A) On the day before the asset is sold. B) On the day the asset is sold. C) On the first day after the day the asset is sold. D) On the first business day after the asset was sold.
Answer B. The day property is disposed of is the last day of its holding period. The holding period generally begins the day after the day the property is acquired.
A taxpayer has both short-term capital loss and nontaxable distribution from an investment. Which of the following statements is incorrect? A) The basis of the investment is reduced by the non-taxable distribution. B) Non-taxable distribution is a return of capital invested. C) Short-term capital loss reduces the basis of the investment. D) Short-term capital losses have no effect on basis.
Answer C. A capital gain (loss) does not impact the basis of an investment.
On January 1, 20X1, Bob paid $11,000 for a bond including a premium of $1,000 when he purchased the $10,000 bond. Bob elected to amortize the bond premium. The amortization is $300 a year, Bob sold the bond on January 2, 20X2. What basis does Bob have in the bond on January 2, 20X2? A) $11,000 B) $10,000 C) $10,700 D) $9,700
Answer C. Amortization decreases basis. Purchase price of $11,000 less $300 amortization (for one year, 20X1) results in a basis of $10,700 on January 2, 20X2.
Carol provides services in 2010 to Bragg Corporation. Her service contract with Bragg Corporation listed her fee at $50,000 receivable in cash and/or stock. At the time her fee was due Bragg Corporation stock was trading for $1,000 per share. Carol elected to receive $30,000 in cash and 20 shares of Bragg Corporation stock. In 2014, the Bragg Corporation stock split increasing the number of Carol's shares to 40. In the current year Carol sells 20 shares of her Bragg Corporation stock for $1,500 per share. What is Carol's basis in the Bragg Corporation shares she still owns? A) $10,000 B) $20,000 C) $30,000 D) $40,000
ANSWER A. Her basis in the 20 shares before the split is $20,000 ($1,000 per share). After the split, she has 40 shares and her basis is still $20,000, with a basis of $500 per share. She sells 20 of those 40 shares, which does not affect the basis of her remaining shares. Her remaining 20 shares still have a basis of $500 each for a total of $10,000.
Ramona gave Abigail three acres land which she had purchased eight years ago for $23,000. The fair value of the land on the date of the gift was $42,000. Shortly thereafter, Abigail sells the land for $39,000. What is the tax basis of the land to determine the gain or loss on this sale? A) $23,000 B) $39,000 C) $42,000 D) $16,000
ANSWER A. The basis of a gift received is the basis in the hands of the gift giver. In this case, that is the original cost of $23,000. There is a significant exception although it does not apply here. When a gift received is sold for less than the basis in the hands of the previous owner, the seller will use the lower of that basis or the fair value at the date of the gift as the basis. That limits the amount of loss that can be deducted by the seller. If the sales price is more than the fair value at the date of the gift but less the original owner's basis, no gain or loss at all is reported.
Julia sold her stock in ABC Company to her sister Hannah for $30,000. Julia's tax basis in this investment was $33,000. Sixteen months later, Hannah sold the stock to an unrelated third party for $32,000 in cash. What is the income tax effect of Hannah's sale? A) Neither a gain nor a loss B) Gain of $2,000 C) Gain of $1,000 D) Loss of $1,000
ANSWER A. The first transaction results in a disallowed loss of $3,000 ($30,000 less $33,000) because the investment was sold to a related party. The second transaction was to an unrelated party and results in a gain of $2,000 ($32,000 less $30,000). The disallowed loss of $3,000 can then be used to reduce this gain for tax purposes to zero. However, a disallowed loss of this type cannot be used to create a taxable loss. Therefore, although the loss of $3,000 is greater than the eventual gain of $2,000, it can only reduce the gain to zero. That is its limit.
If ABC Corporation bought and took delivery of a set of office furniture for the CEO's office on December 31, 20X1, and the CEO took it with him as part of his severance package when he left the company on December 31, 20X2, ABC's holding period is? A) Not more than one year B) Less than one year C) More than one year D) More than one year only if ABC is an accrual basis taxpayer
ANSWER A. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period. The holding period for the furniture began on January 1, 20X2, the day after ABC acquires the property (bought on December 31, 20X1). The holding period ends on December 31, 20X2, the day ABC distributes the property, which is exactly one full year. The holding period for short-term capital gains and losses is one year or less. ABC's holding period is exactly one year, therefore it is not more than one year, making this a short-term gain (loss).
Vito acquired an acre of land as a gift. At the time of the gift, the acre had a fair market value (FMV) of $45,000. Tom Hagen, who gave Vito the acre, had an adjusted basis in the land of $35,000. No gift tax was paid on the land. No events occurred to increase or decrease his basis in the property. Vito later sold the acre for $10,000 to Barzini. What is Vito's gain or loss on the sale? A) $35,000 loss B) $25,000 loss C) $0 gain or loss D) $10,000 gain
ANSWER B. If the FMV is equal to or greater than the donor's adjusted basis, the taxpayer's basis is the donor's adjusted basis at the time the taxpayer received the gift. In this problem the FMV of the property on the date of the gift ($45,000) was more than the donor's adjusted basis of $35,000. Vito's basis for the land is the donor's (Tom's) adjusted basis at the time the taxpayer received the gift of $35,000. Vito later sold the land to Barzini for $10,000. Vito's loss is $25,000 ($10,000 sale price - $35,000 basis).
Mr. Jones had a net short-term capital gain in Year One of $18,000. By coincidence, Ms. Smith had a net long-term capital gain of $18,000 in that same year. Without consideration for these capital gains, both taxpayers had taxable income amounts of $100,000. They are both single taxpayers. Which of the following statements is true? A) In connection with the capital gains, the two taxpayers will pay the same amounts. B) In connection with the capital gains, Mr. Jones will pay more taxes than Ms. Smith. C) In connection with the capital gains, Ms. Smith will pay more taxes than Mr. Jones. D) From the information provided, it is impossible to tell which party will pay the most income taxes.
ANSWER B. Net short-term capital gains are taxed at ordinary income rates. Net long-term capital gains are taxed at lower rates. The specific rate depends on the income level of the taxpayer. Net long-term capital gains receive this tax advantage to encourage investors to buy capital assets and hold them for longer than one year.
How should an individual report the following transactions on a return? Total short-term capital losses $6,000 Total short-term capital gains $15,000 Total long-term capital losses $10,000 Total long-term capital gains $10,000 A) $0 net capital gain B) $6,000 net capital gain C) $9,000 net capital gain D) $21,000 net capital gain
ANSWER C. A taxpayer may calculate total net gain (loss) by comparing the net short-term capital gain (loss) to the net long-term capital gain (loss). The long-term gains and losses cancel out, and the short-term gain exceeds the short-term loss by $9,000. This leaves a net capital gain of $9,000, the character of which is short-term.
Silas Wykowski receives 20 shares of stock from a friend as a gift. These shares had originally cost the friend $400 but were only worth $300 when the conveyance to Silas was made. The stock was held for some time and then sold for $280. What is the income tax effect recognized by Silas Wykowski? A) $300 gain at the time of gift and a $20 loss when sold. B) No gain or loss at the time of gift and a $120 loss when sold. C) No gain or loss at the time of gift and a $20 loss when sold. D) $400 gain at the time of gift and a $120 loss when sold.
ANSWER C. There is no income tax effect when a gift is made. A gift tax might have to be paid if the amount is large but this is a small gift. If the value then goes down, the owner can recognize a loss when sold. That loss is the difference in what was received and the lower of the tax basis to the previous owner (usually original cost) and the fair value at the date of the gift. Here, that fair value when conveyed ($300) is less. So, the tax loss is this $300 less the $280 sales price or $20.
The basis in property inherited from a decedent may be determined as follows: A) The decedent's basis plus any inheritance tax paid on the increased value. B) The fair market value at the date of death. C) The fair market value at an alternate valuation date. D) Either the fair market value of the property on the date of death or an alternate valuation date, if elected.
ANSWER D. Basis of an inherited capital asset is generally the FMV of the property on the date of death or an alternate valuation date, if elected by the personal representative.
Which of the following is NOT a capital asset? A) Inventory B) Household furnishings C) Gems and jewelry D) Stocks and bonds
Answer A. A capital asset is any property held for personal or investment use. Generally, any property held by a non-dealer is a capital asset. Capital assets include a personal home, household furnishings, gems and jewelry, and stocks and bonds. Noncapital assets include accounts or notes receivables, and inventory held primarily for sale to customers. IRS Pub. 544
Billy Bob Lowdermilk owns securities with a tax basis of $8,000. He gives them to Jamie Orwell when they are worth $7,100. She holds them and they begin to climb slowly in value. She eventually sells them for $7,800. What is the impact on taxable income that she must report on this sale? A) Zero B) $700 gain C) $200 loss D) $900 loss
Answer A. At the time of the gift, the securities are worth less than the donor's basis. The IRS will not allow a taxpayer to shift losses to another taxpayer by gifting property. Therefore, in cases where the fair market value of the property is lower than the donor's basis you will need to determine if the property is sold at a gain, or a loss. The basis for figuring gain is the same as the donor's adjusted basis, and the basis for figuring a loss is the FMV on the date of the gift. In this example, using the donor's basis to figure a gain is not possible since $7,800 - $8,000 basis results in a loss of $200, and is not allowed. Using the FMV at the time of the gift to figure a loss $7,800 - $7,100 FMV results in a $700 gain, not a loss. This question is an example of a zero tax situation resulting from the dual basis rules. 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.
If a business asset is sold but the seller agrees to finance the sale over five years, the seller must? A) Record any depreciation recapture income in the year of sale B) Recognize any gain in the year of sale as a capital gain C) Must report any loss as an installment sale on Form 6252 D) Calculate the gross profit percentage by dividing the contract price by the gross profit from the sale
Answer A. Do not file Form 6252 for sales that do not result in a gain. If a taxpayer sells property on which a depreciation deduction was claimed or could have been claimed, the taxpayer must report the amount of the deduction (or amount which could have been claimed) as depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Report the recapture income in full as ordinary income in the year of sale; report only the gain greater than the recapture income on the installment method.Calculate this gross profit percentage by dividing the gross profit from the sale by the contract price.
Ben is a limited partner in three different partnerships. Two of the partnerships lost money in this tax year and one was profitable: Partnership A: loss of $2,000 Partnership B: profit of $3,300 Partnership C: loss of $4,100 Ben has no other passive income during the tax year. What amount can Ben deduct as a loss on his individual income tax return in the current year? A) Zero B) $3,000 C) $2,800 D) $6,100
Answer A. Passive activity losses are generally not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation. The net passive loss of $2,800 (- $2,000 + $3,300 - $4,100) would be disallowed and would be carried over.
In Year One, James Hayes owned a valuable pocket watch. It had a tax basis of $12,000 but a fair value of $23,000. The pocket watch was stolen and never recovered. The insurance company settled his claim with the payment of $20,000. He immediately took this money and another $1,000 of his own money and bought a replacement pocket watch for $21,000. In Year Two, he sold this second pocket watch for $24,000 in cash. What is the impact of these transactions from an income tax perspective? A) No gain or loss in Year One but an $11,000 taxable gain in Year Two B) A $3,000 taxable loss in Year One but a $14,000 taxable gain in Year Two C) An $8,000 taxable gain in Year One and another $3,000 taxable gain in Year Two D) No gain or loss in Year One but a $3,000 taxable gain in Year Two
Answer A. The original asset was converted into cash but that event was not based on the intent of the taxpayer. Thus, the Year One transaction is an involuntary conversion. This is a casualty gain since the taxpayer received more than the tax basis for the original pocket watch. By buying a replacement and using all of the received funds, that gain is deferred (because it resulted from an involuntary conversion). In Year Two, the second watch is sold and the gains must be recognized. The taxpayer had paid a total of $13,000 ($12,000 for the first watch and an additional $1,000 for the second) and received $24,000. The $11,000 difference is a gain to be recognized in Year Two when the watch is sold to the outside party.
If a taxpayer has capital gains dividends, but has no other capital gain: A) Capital gain distributions must be put on Schedule B B) No Schedule D is required and the amount is put directly on Form 1040 C) Dividends and capital gains dividends may be added together on Schedule B D) It must be combined with interest on Schedule B
Answer B. Schedule D is not required when the only capital gains are from dividends.
Mr. A dies on February 1, Year One when stock that he owned was worth $50,000. He had bought the stock three weeks before his death for $47,000. The stock was worth $54,000 on August 1, Year One (six months later). The shares were conveyed to his nephew on September 1, Year One when the investment was worth $56,000. He sold all the shares five weeks later for cash of $59,000. The executor of the estate did choose to use the alternative valuation date. What was the nephew's taxable gain on the sale of this stock? A) Zero B) $3,000 C) $5,000 D) $9,000
Answer C. Normally, the value at the date of death is used as the tax basis by the recipient of property. However, if the executor chooses the alternative valuation date, the value of the property six months after death or on the date of conveyance (whichever comes first) is used as the tax basis. In this problem, six months come first so the value at August 1 is the tax basis to the nephew. That is $54,000. When the property is sold for $59,000, a gain of $5,000 is recognized by the nephew for tax purposes.
Walker Ambrose owns three acres of land in Tennessee with a cost of $70,000 and a fair value of $110,000. The state of Tennessee condemns the land and takes ownership so that a road can be built through the property. The state pays Ambrose $114,000 for the land it took. Ambrose takes this money and buys similar land four miles away for $111,000. What is the tax effect of these events? A) No taxable gain or loss. B) Ambrose has a taxable gain of $44,000. C) Ambrose has a taxable gain of $3,000. D) Ambrose has a taxable gain of $4,000.
Answer C. This is an involuntary conversion since the property was sold without the owner's consent. More money was received than the tax basis of this property so there was a gain of $44,000 ($114,000 less $70,000). Part of the money was then used to buy similar replacement property. In an involuntary conversion, the taxable gain is the lower of the actual gain on the transaction ($44,000) or the money left over after the replacement ($3,000 or $114,000 less $111,000). Thus, if all of the money is used in buying a replacement, there is no taxable gain. Here, $3,000 was left and that was less than the $44,000 gain.Bottom of Form
When does the holding period for a purchased asset begin? A) On the day before the asset was acquired B) On the day the asset was acquired C) On the first day after the asset was acquired D) On the first business day after the asset was acquired
Answer C. To determine the holding period, a taxpayer must start counting on the day following the day upon which the asset was acquired. It does not matter whether any of the days were business days or not.
Horace Turner owned a building with an income tax basis of $400,000 but with an estimated fair value of $510,000. The property was condemned by the local government so that the property could be used for a landfill. To avoid litigation, the government paid him $530,000. He used $360,000 of this money to buy property that qualified as replacement property. What gain, if any, should he recognize on this condemnation of this building? A) Zero B) $20,000 C) $130,000 D) $170,000
Answer C. When property is condemned, destroyed, or stolen, it is viewed as an involuntary conversion. If the owner receives an amount below the tax basis of his business property, a loss must be recognized for the difference. In this case, the owner collected $130,000 in excess of the tax basis. Because the sale was not intended but was created by an involuntary conversion, the gain that is reported for tax purposes is this $130,000 gain or the amount of the proceeds remaining after similar property is acquired as a replacement. Although $530,000 was received, only $360,000 was used for the replacement property. The $170,000 ($530,000 received - $360,000 used for replacement) in cash that is left is more than the $130,000 gain. As the lower figure, the $130,000 is Turner's taxable gain.
Connor purchased Flora stock in 20X1 and sold it in 20X9. In 20X9, he also sold a copy machine that he had been using in his business since 20X1. On December 15, 20X9, he inherited 35 shares of Fauna Laboratories stock. What is the holding period for these properties? A) All short-term B) Flora stock long-term, copy machine and Fauna stock short-term C) Flora and Fauna stock long-term, copy machine short-term D) All long-term
Answer D. A taxpayer who inherits property will always treat holding period as long-term when sold, no matter how long they actually held the property. The holding period for the copier and stock bought in 20X1 and sold in 20X9 is also long-term (held longer than one year).
An increase in basis of property can be due to items properly added to a capital account. These items include all of the following, EXCEPT: A) Adding a bathroom B) Building a fence C) Paving the driveway D) Amounts received for granting an easement
Answer D. Capital improvements include putting a rec room in an unfinished basement, adding a bathroom or bedroom, building a fence, installing new plumbing, installing a new roof, paving the driveway. The basis of property decreases by all items that represent a return of capital, including non-taxable corporate distributions, casualty and theft losses, easements, depreciation and section 179 deductions.
Patti inherited 100 shares of Superbubble Inc stock when her mother died on August 8, 20X1; the fair market value of the stock was $10 per share. Her mother paid $290 per share when she purchased the stock ten years prior. If Patti sells all 100 shares for $60 per share on July 3, 20X4, how should she report the sale on her return for 20X4? A) $23,000 short-term capital loss B) $5,000 short-term capital gain C) $23,000 long-term capital loss D) $5,000 long-term capital gain
Answer D. In general, capital gains or losses from the sale of inherited property are treated as long-term. Patti's basis in the stock is the FMV of the stock on her mother's date of death (100 shares at $10 per share is $1,000). She sold the stock for $6,000 which means the gain was $5,000 and is a long-term capital gain. In this case, the opportunity to deduct a substantial loss on the stock was lost when her mother passed away.
The amount realized from the sale or exchange of property is generally the selling price minus _________? A) Improvements B) Depreciation C) Construction costs D) Selling expenses
Answer D. The amount realized from a sale or exchange is the total of all money received plus the fair market value of all property or services received. It also includes any liabilities that were assumed by the buyer and any liabilities to which the property transferred is subject, such as real estate taxes or a mortgage. Selling expenses must be deducted from this total and expenses include: commissions, advertising fees, legal fees, and loan charges paid by the seller, such as points. The amount realized will be reduced by the adjusted basis in the property. Cost basis is increased by the cost of improvements made to the property and decreased by depreciation.
If an involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award, which of the following statements is correct? A) Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. B) You may not have to report a gain on an involuntary conversion if you receive property that is similar or related in service or use to the converted property. C) If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can choose to postpone reporting the gain. D) All of the above are true.
Answer D. The taxpayer has a disposition when property is converted into cash or another property (taxpayer receives another property or money in payment). If the event was not based on the intent of the taxpayer, the transaction is an involuntary conversion. The IRS treats this as a sale and the taxpayer may be able to exclude all or part of any gain from an involuntary conversion. Gain or loss from an involuntary conversion is usually recognized. However, all or part of a gain from the involuntary conversion can be postponed if qualified replacement property is acquired. A gain is recognized only to the extent that all of the proceeds as a result of the involuntary conversion are not used to buy qualified replacement property. Gain or loss from an involuntary conversion of taxpayer's property is usually recognized for tax purposes unless the property is the taxpayer's main home.
Susan McKenzie inherited 500 shares of a stock with a market value of $40 per share from her aunt. The aunt's tax basis in the stock was $22 per share. What amount of income should McKenzie report on her tax return as a result of this conveyance? A) $20,000 B) $11,000 C) $9,000 D) Zero
Answer D. The value of assets received through inheritance is not reportable on an income tax return as income for the simple reason that inheriting assets is not the same as earning income. The property will have a tax basis equal to the fair value of the assets on the date of death. However, the executor of the estate may choose an alternate valuation date which is 6 months from the date of death (or the date of conveyance, if earlier).
Maggie Miranda had the following transactions during 20X1: $36,000 short-term capital loss $15,000 long-term capital loss $25,000 short-term capital gain $22,000 long-term capital gain What is the impact on taxable income for 20X1? A) $7,000 taxed as a long-term capital gain B) $3,000 short-term capital loss carried forward to future years C) $7,000 long-term capital gain taxed at capital gain rates and $3,000 short-term capital loss which is deductible against ordinary income D) $3,000 short-term capital loss deducible against ordinary income.
Answer D. There is a net $11,000 short-term capital loss ($36,000 minus $25,000) and a net $7,000 long-term capital gain ($22,000 minus $15,000). The $11,000 loss and the $7,000 gain net to a $4,000 loss which is short-term because $11,000 is larger than $7,000. A net capital loss of up to $3,000 is deductible against ordinary income each year as a deduction in arriving at AGI. Because it is an individual taxpayer, the remaining $1,000 loss is carried forward indefinitely to impact future capital gain and loss computations.
