Tax Test 3 Questions

In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, had a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain? a. $0 b. $50,000 c. $100,000 d. $150,000

$50,000 Section 1031 defers recognizing gain or loss to the extent that property productively used in a trade or business is exchanged for property of like-kind. "An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange." Therefore, the exchange of farmland for an office building qualifies for nonrecognition. Additionally, liabilities are not qualified property and are treated as money paid or received. Also, realized gain is usually recognized equal to the lesser of gain realized or boot received. The amount of Tatum's recognized gain is calculated as follows: FMV office building $350,000 + Liabilities relieved $120,000 = Amount realized $470,000 - AB farmland $(250,000) - Liabilities assumed $(70,000) = Gain realized $150,000 Net boot received equals $50,000 ($120,000 liability relief - $70,000 liabilities assumed), and since Tatum recognizes the lesser of gain realized or boot received, Tatum recognizes $50,000 of gain.

Mr. E, a sole proprietor, is in the process of selling his retail store. Based on the following list of assets used in his business, what is the total amount of E's capital assets? Accounts receivable $20,000 Merchandise inventories $30,000 Buildings $40,000 Copyrights created by E $20,000 Goodwill acquired in 1990 $30,000 Land $40,000 Furniture and fixtures $20,000 (The goodwill is not being amortized.) a. $30,000 b. $0 c. $80,000 d. $200,000

correct answer: a. $30,000 Under Sec. 1221, a capital asset is defined as any property held by the taxpayer (whether or not it is connected with his or her trade or business) that is not specifically excluded by Sec. 1221. Land used in a business, accounts receivable, inventories, and copyrights created by the owner are specifically excluded. Buildings and furniture and fixtures are excluded as depreciable property used in a business. E's only capital asset is the goodwill ($30,000) acquired in 1990. This goodwill is not eligible to be amortized under Sec. 197, since it was acquired before July 25, 1991 (the earliest date that Sec. 197 applies to goodwill).

On June 15, Year 2, Tim sold 100 shares of Y Corporation stock for $20 per share. Tim's records relating to the sale reflect the following information: Date Purchased | Number of Shares | Adjusted Basis June 1, Year 1 | 40 | $25 January 2, Year 2 | 60 | $10 Determine the gain or loss from the stock sale. a. $600 short-term capital gain and $200 long-term capital loss. b. $600 short-term capital gain and $200 short-term capital loss. c. $600 long-term capital gain and $200 long-term capital loss. d. $600 long-term capital gain and $200 short-term capital loss.

correct answer: a. $600 short-term capital gain and $200 long-term capital loss. Under Reg. 1.1012-1(c), the basis and holding period of stock which was acquired in several different transactions is determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. In this transaction the number of shares sold equals the number purchased. So, the issue is determining the amount and character of gain. The first 40 shares were purchased on June 1, Year 1, for $25 per share. The sale produces a long-term capital loss of $200 ($800 - $1,000). The remaining 60 shares were purchased on January 2, Year 2, for $10 per share. Their sale results in a short-term capital gain of $600 ($1,200 - $600).

Ms. Birch purchased the following stocks: 300 shares of Music Corp. on 1/18/19 for $3,000 200 shares of Play Corp. on 2/11/19 for $2,000 600 shares of Fun Corp. on 4/27/19 for $16,000 100 shares of Book Corp. on 12/19/19 for $8,000 On April 27, 2020, Ms. Birch sold all of the above stock for the following amounts: Music Corp.$ 5,000 Play Corp. $10,000 Fun Corp. $4,000 Book Corp. $14,000 What are Ms. Birch's net long-term capital gains or losses (LTCG/LTCL) and short-term capital gains or losses (STCG/STCL) on the above transactions? a. LTCG, $10,000; STCL, $6,000. b. LTCG, $16,000; STCL, $12,000. c. LTCL, $2,000; STCG, $6,000. d. None of the answers are correct.

correct answer: a. LTCG, $10,000; STCL, $6,000. For property acquired after 1988, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year. If the capital gain or loss is not long-term, it is short-term. The holding period of an asset begins on the day after acquisition and includes the disposal date. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (Music Corp. and Play Corp.) resulted in a net long-term capital gain of $10,000. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions (Fun Corp. and Book Corp.), resulting in a net short-term capital loss of $6,000.

An individual had the following capital gains and losses for the year: Short-term capital loss $70,000 Long-term gain (unrecaptured Section 1250 at 25%) $56,000 Collectibles gain (28% rate) $10,000 Long-term gain (15% rate) $20,000 What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)? a. Long-term gain of $16,000 at the 15% rate. b. Short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the 15% rate. c. Long-term capital gain of $3,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate. d. Short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.

correct answer: a. Long-term gain of $16,000 at the 15% rate. The short-term capital loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. The $70,000 loss will entirely offset the $10,000 collectibles gain and the $56,000 unrecaptured Section 1250 gain. The remaining $4,000 will partially offset the $20,000 15% long-term gain leaving $16,000 of long-term gain at a 15% rate.

Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000, and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock? a. $0 b. $2,000 gain. c. $3,000 gain. d. $3,000 loss.

correct answer: b. $0 If the FMV on the date of the gift is less than the donor's basis, the donee has a dual basis for the property.Loss basis. The FMV at the date of the gift is used if the property is later transferred at a loss. Gain basis. The donor's basis is used if the property is later transferred at a gain. If the property is later transferred for more than FMV at the date of the gift but for less than the donor's basis at the date of the gift, no gain (loss) is recognized. Therefore, Dunn does not report any gain or loss ($32,000 gain basis > $29,000 sale price > $27,000 loss basis).

Leker exchanged a building that was used exclusively for business and had an adjusted tax basis of $200,000 for a new building. The new building had a fair market value of $100,000, and Leker also received $30,000 in cash. What was Leker's tax basis in the acquired building? a. $200,000 b. $170,000 c. $130,000 d. $70,000

correct answer: b. $170,000 The basis of property received in a like-kind exchange is equal to the adjusted basis of the property surrendered, decreased by any boot received and increased by any gain recognized or boot given. Since this is a like-kind exchange (one building for another) and Leker received boot along with the like-kind property, he will recognize gain to the extent of the lesser of the realized gain or the value of boot received. In this case, however, Leker does not have a realized gain. Thus, no gain is recognized. The basis in the new building (the like-kind property) will be the basis of the property transferred ($200,000), minus the amount of boot received ($30,000), or $170,000.

Billy Luker made several stock sales during 2020. Determine the net capital gain or loss for the following transactions: Date Purchased | Cost | Date Sold | Sales Price 1-1-20 | $4,000 | 6-2-20 | $6,000 7-6-19 | $10,000 | 7-7-20 | $14,000 7-6-19 | $20,000 | 7-6-20 | $17,000 4-3-19 | $5,000 | 6-2-20 | $4,000 a. $2,000 net short-term capital gain. b. $2,000 net capital gain. c. $3,000 net long-term capital gain and $1,000 net short-term capital loss. d. $4,000 net long-term capital gain and $2,000 net short-term capital loss.

correct answer: b. $2,000 net capital gain. The term "net capital gain or loss" means the excess of net long-term capital gain over net short-term capital loss, $2,000 ($3,000 - $1,000). The term "net long-term capital gain" means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year. Gains and losses resulting from the sale or exchange of capital assets held 1 year or less are characterized as short-term. All other gains are characterized as long-term. The first and third stock sales are short-term and equal a net $1,000 loss. The second and fourth stock sales are long-term and equal a net $3,000 gain.

For the current year, Michael King reported salary and taxable interest income of $40,000. His capital asset transactions during the year were as follows: Long-term capital gains (15% basket) $2,000 Long-term capital losses (28% basket) $(8,000) Short-term capital gains $1,000 For the current year, King should report adjusted gross income of a. $35,000 b. $37,000 c. $38,500 d. $39,000

correct answer: b. $37,000 Under Sec. 1211, a taxpayer may deduct the excess of the net long-term capital loss over net short-term capital gain, provided that such amount does not exceed $3,000. The long-term capital loss in the 28% basket is first offset against the long-term capital gain in the 15% basket. After the gain in the 15% basket is exhausted, the remaining net capital loss of $6,000 ($2,000 - $8,000) is applied against the net short-term capital gain of $1,000. King's excess of net long-term capital loss over net short-term capital gain is $5,000 ($6,000 - $1,000). Therefore, the $3,000 limit applies. Salary and interest income $40,000 Less: Capital loss deduction $(3,000) Adjusted gross income $37,000

On March 1, Year 1, Paul purchased a machine for use in his business. He sold the machine 9 months later for $11,000. At the time of the sale, the machine had an adjusted basis of $10,250. What is the amount and character of the gain? a. $750 long-term capital gain. b. $750 ordinary income. c. $750 Sec. 1231 gain. d. No gain should be recognized.

correct answer: b. $750 ordinary income. Capital assets are any property not excluded by IRC definition. Real property used in a trade or business is excluded. Section 1231 property includes all real or depreciable property used in the taxpayer's trade or business and held more than 1 year. Since the asset was not held long-term, this is not a Sec. 1231 asset and the gain is ordinary income.

Mr. J, who has $15,000 of salary income, sold land that he had purchased for investment purposes 10 years ago to Ms. P for $5,000 cash and her assumption of an existing mortgage of $2,000 and delinquent back taxes of $1,500. Mr. J's adjusted basis in the land was $10,000, and he paid $600 in selling costs. What is Mr. J's deductible loss, assuming he had no other capital asset transactions? a. $0 b. $(1,500) c. $(2,100) d. $(2,400)

correct answer: c. $(2,100) The gain or loss from the sale of property is the amount realized less the adjusted basis (Sec. 1001). Mr. J realized $5,000 in cash, relief of a mortgage liability of $2,000, and relief of back taxes of $1,500. This gross amount realized totals $8,500. However, selling costs decrease the amount realized, so Mr. J's net amount realized is $7,900 ($8,500 - $600). Mr. J's recognized loss is $2,100 ($7,900 realized - $10,000 basis). This is a long-term capital loss since property held for investment is a capital asset and such property has been held for more than 1 year. It is all deductible since it does not exceed the $3,000 annual limitation of Sec. 1211.

Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain? a. $0 b. $5,000 c. $10,000 d. $15,000

correct answer: c. $10,000 The amount of the gift is the FMV of the property given. However, the donee's basis in the gift is the same basis as it was in the donor's hands plus any gift taxes paid.

Jack had the following items of income and loss in Year 7: Wages $122,500 Nonbusiness bad debt $1,400 Gain on stock held since Year $52,600 Flood loss to his personal residence located in a federally declared disaster area owned since Year $14,100 Loss on stock held since Year 4 $300 Gain on stock held for 4 months $2,050 What is his total taxable capital gain or total deductible capital loss for Year 7? a. $1,150 loss. b. $2,300 gain. c. $2,950 gain. d. $4,350 gain.

correct answer: c. $2,950 gain. Jack had a net long-term capital gain of $2,300 resulting from the $2,600 gain on the sale of stock and the $300 loss on the sale of some other stock. Jack had a net short-term capital gain of $650 resulting from the sale of stock held for 4 months and the $1,400 nonbusiness bad debt. Nonbusiness bad debts are treated as short-term capital losses under Sec. 166. The flood loss is an itemized deduction, not a capital loss. Net long-term capital gain ($2,600 - $300) $2,300 + Net short-term capital gain ($2,050 - $1,400) $650 = Total taxable capital gain $2,950

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245, Gain from Dispositions of Certain Depreciable Property? a. $13,000 b. $17,000 c. $20,000 d. $30,000

correct answer: c. $20,000 Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized. The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property. The $20,000 gain realized is less than the depreciation taken ($30,000).

John owned a printing business and sold the following assets in Year 2: Printing press: Sales price $25,000 Original cost $20,000 Allowed or allowable depreciation $8,000 Computer equipment: Sales price $30,000 Original cost $28,000 Allowed or allowable depreciation $14,000 John had a net Sec. 1231 loss of $6,000 in Year 1. What is the amount and character of John's gain for Year 2? a. $14,000 ordinary income; $15,000 capital gain. b. $22,000 ordinary income; $7,000 capital gain. c. $28,000 ordinary income; $1,000 capital gain. d. $0 ordinary income; $29,000 capital gain.

correct answer: c. $28,000 ordinary income; $1,000 capital gain. Section 1231 property is depreciable or real property used in a trade or business and held for more than 1 year or an involuntarily converted nonpersonal capital asset (i.e., held in connection with a trade or business or a transaction entered into for profit) held for more than 1 year. A taxpayer who has a net Sec. 1231 gain (i.e., excess of Sec. 1231 gains over Sec. 1231 losses) for the tax year must review the 5 most recent preceding tax years for possible recapture of net Sec. 1231 losses for such years. If there were any net Sec. 1231 losses during such period, the taxpayer must treat the current year's net Sec. 1231 gain as ordinary income to the extent of the amount of unrecaptured net Sec. 1231 losses for that past period [Sec. 1231(c)]. The losses are to be recaptured on a first-in, first-out (FIFO) basis. John realizes a total gain of $29,000. Since the assets also qualify as Sec. 1245 property, this Sec. 1231 gain is recharacterized as ordinary income to the extent of depreciation recaptured ($22,000) and to the extent of any unaccounted for Sec. 1231 loss ($6,000). The remaining $1,000 is recognized as a Sec. 1231 gain.

For 2020, Mr. G has a short-term capital loss of $4,000, a short-term capital gain of $1,900, a short-term capital loss carryover from 2018 of $700, a long-term capital gain of $800 from property held for 3 years, and a long-term capital loss of $1,500 from property held for 4 years. Mr. G is in the 15% breakpoint basket. What is Mr. G's deductible loss in 2020? a. $0 b. $2,800 c. $3,000 d. $3,500

correct answer: c. $3,000 Short-term capital gains and losses and long-term capital gains and losses are first netted to determine the capital loss deduction. The carryover from 2018 retains its character as a short-term capital loss and is netted with the other short-term transactions. Short-term: ($1,900 - $4,000 - $700) = $(2,800) Long-term (15% basket): ($800 - $1,500) = $(700) Total Capital loss = $(3,500) Since the loss computed above exceeds $3,000, the amount deductible is limited to the lesser of $3,000 or taxable income (Sec. 1211). Long-term capital losses of $500 are carried forward to the 28% basket.

Mr. Smith, a single taxpayer, died in Year 4. His Year 4 taxable income of $40,000 included the following stock transactions: Stock | Purchased | Sold | Adjusted Basis | Selling Price Charlie | 03/18/Yr 4 | 5/20/Yr 4 | $3,000 | $4,500 Edward | 10/10/Yr 1 | 7/11/Yr 4 | $5,500 | $1,100 Diane | 04/23/Yr 4 | 7/29/Yr 4 | $1,700 | $1,600 Meg | 02/05/Yr 2 | 9/16/Yr 4 | $8,000 | $6,000 What is the amount of the capital loss deduction for Year 4 and the amount of the capital loss carryover to the decedent's estate? Capital Loss Deduction | Carryover a. $5,000 | $0 b. $3,000 | $2,000 c. $3,000 | $0 d. $5,000 | $3,000

correct answer: c. $3,000 | $0 Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. However, there can be no carryover from a decedent to his or her estate. Therefore, $3,000 of Mr. Smith's capital loss may be deducted, and there is no carryover.

Mr. Pine purchased a small office building. Included in his costs were the following: Cash down payment $50,000 Mortgage on property assumed $300,000 Title insurance $2,000 Fire insurance premiums $2,000 Attorney fees $1,000 Rent to former owner to allow Mr. Pine to occupy the office building prior to closing $4,000 What is Mr. Pine's basis in the property? a. $359,000 b. $355,000 c. $353,000 d. $350,000

correct answer: c. $353,000 The basis of property is its original cost. The cost of property includes debt to which the property is subject (Crane, 331 U.S. 1, 1947). Further, the cost of property includes necessary expenses paid in connection with the acquisition of the property. The attorney fees and title insurance are included in the cost of the property. The fire insurance premiums and rent expense, however, are not paid in connection with the acquisition of the property. Thus, the basis is $353,000 ($50,000 cash payment + $300,000 mortgage assumed + $2,000 title insurance + $1,000 attorney fees).

Mr. McCarthy exchanged real estate that he held for investment purposes for other real estate that he will hold for investment purposes. The real estate that he gave up had an adjusted basis of $8,000. The real estate that he received in the exchange had a fair market value of $10,000, and he also received cash of $1,000. Mr. McCarthy paid $500 in exchange expenses. What is the amount of gain recognized by Mr. McCarthy? a. $1,000 b. $2,500 c. $500 d. None of the answers are correct.

correct answer: c. $500 The basis of property acquired in a like-kind exchange is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized or boot given [Sec. 1031(d)]. The gain recognized equals the lesser of the realized gain ($10,000 FMV of land + $1,000 boot received - $8,000 basis - $500 boot given) or the boot received ($1,000). The IRS has ruled that exchange expenses may be deducted in computing the amount of gain or loss realized, offset against cash payments received in determining gain to be recognized, or included in the basis of the property received (Rev. Ruling 72-456). The best action would be to offset the cash received. Therefore, Mr. McCarthy will recognize a $500 gain ($1,000 - $500).

Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year). A machine used in the business was sold for $400,000. It cost $330,000 when purchased 3 years ago, and its adjusted tax basis when sold was $210,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $99,000. A $500,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $524,000. A new warehouse was rebuilt at a cost of $600,000. What is the basis of the new warehouse? a. $524,000 b. $576,000 c. $600,000 d. $624,000

correct answer: c. $600,000 The realized loss was fully recognized, so the basis of the new warehouse is its cost of $600,000.

The holding period for determining long-term capital gains and losses is more than a. 6 months. b. 9 months. c. 12 months. d. 18 months.

correct answer: c. 12 months. Under Sec. 1222, capital assets must be held for more than 1 year in order for the gain or loss on sale or exchange to be treated as long-term.

Capital assets include a. A corporation's accounts receivable from the sale of its inventory. b. Seven-year MACRS property used in a corporation's trade or business. c. A manufacturing company's investment in U.S. Treasury bonds. d. A corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.

correct answer: c. A manufacturing company's investment in U.S. Treasury bonds. Capital assets are all property held by a taxpayer not excluded by the IRC. Among the items excluded are accounts receivable, depreciable property, and real property used in a trade or business. The investment in U.S. Treasury bonds is a capital asset.

The results of Digimatic Corporation's first 3 years of operations are presented below: Year | Results of Operations Year 1 | Sec. 1231 losses of $10,000 Year 2 | Sec. 1231 losses of $15,000 Year 3 | Sec. 1231 gain of $75,000 Digimatic Corporation's Year 3 Sec. 1231 gain can best be characterized as a. A net long-term capital gain of $75,000. b. A net long-term capital gain of $50,000. c. A net long-term capital gain of $50,000 and ordinary income of $25,000. d. A net long-term capital gain of $25,000 and ordinary income of $50,000.

correct answer: c. A net long-term capital gain of $50,000 and ordinary income of $25,000. The net Sec. 1231 gain for any taxable year is treated as ordinary income to the extent that the gain does not exceed the nonrecaptured net Sec. 1231 losses. The nonrecaptured net Sec. 1231 loss is the excess of all Sec. 1231 losses for the 5 most recent taxable years over the portion of such losses already recaptured [Sec. 1231(c)]. For Digimatic Corporation in Year 3, the nonrecaptured net Sec. 1231 loss is $25,000 ($10,000 in Year 1 + $15,000 in Year 2). Therefore, the $75,000 net Sec. 1231 gain in Year 3 must be treated as $25,000 of ordinary income (recapture of the previous Sec. 1231 losses of $25,000) and $50,000 of long-term capital gain.

In Year 4, Bach sold a painting for $50,000 purchased for his personal use in Year 1 at a cost of $20,000. In Bach's Year 4 income tax return, the sale of the painting should be treated as a transaction resulting in a. No taxable gain. b. Section 1231 (capital gain-ordinary loss rule) gain. c. Long-term capital gain. d. Ordinary income.

correct answer: c. Long-term capital gain. The gain upon the disposition of the painting is taxable because Bach recognized income as defined in Sec. 61(a)(3) from "dealings in property." Since Bach held the painting for over one year, the gain recognized from the sale of the painting will be long-term capital gain.

In Year 1, Rick bought a collectible watch for his own use at a cost of $8,000. In Year 5, when the fair market value was $12,000, Rick gave this watch to his son, Chris. No gift tax was due. Which of the following correctly states the holding period and the type of asset? a. Starts Year 5 | Sec. 1231 b. Starts Year 5 | Capital asset c. Starts Year 1 | Capital asset d. Starts Year 1 | Sec. 1231

correct answer: c. Starts Year 1 | Type of Asset The basis of property acquired by gift is generally the same as the basis in the hands of the donor. The holding period of property that has a transferred/carryover basis includes the holding period of the prior owner. Chris's holding period, therefore, begins in Year 1 when Rick purchased the watch. Capital assets include all property held by a taxpayer unless excluded by the IRC. Personal-use property, such as jewelry, is a capital asset.

At December 31, Year 2, the following assets were among those owned by Rea: Jan. Year 1 | Personal residence | $200,000 Feb. Year 1 | Stock of listed corp. | $16,000 Dec. Year 2 | Stock of listed corp. | $6,000 Total capital assets amounted to a. $16,000 b. $22,000 c. $216,000 d. $222,000

correct answer: d. $222,000 Capital assets include all property held by a taxpayer unless excluded by the IRC. Excluded are inventory (e.g., stock in trade held by a broker for sale to customers), depreciable business property, real property used in a trade or business, copyrights and artistic compositions created by the owner, accounts and notes receivable, and certain U.S. government publications acquired at reduced cost. Personal use property, such as a residence, is a capital asset.

For 2019, Mr. H had a taxable income of $120,000, excluding exemptions and capital transactions. In 2019, H's capital transactions were as follows: Long-TermLong-TermShort-Term(28% Basket)(15% Basket)Gains$10,000 $20,000 $ 2,000 Losses(13,000)(24,000)(0) In addition, Mr. H had a $2,200 short-term capital loss carryover and a $1,000 long-term capital loss carryover, both from 2018. Mr. H had $482,000 of ordinary income. What is the amount of H's capital loss deduction in 2019 and capital loss carryover to 2020? Deduction | Short-Term C/O | Long-Term (28% Basket) C/O | Long-Term (15% Basket) C/O a. $0 |$5,200 | $5,000 | $0 b. $3,000 | $200 | $5,000 | $0 c. $3,000 | $200 | $0 | $5,000 d. $3,000 | $2,200 | $3,000 | $0

correct answer: d. $3,000 | $2,200 | $3,000 | $0 A net loss of $5,000 is contained in the 28% basket ($20,000 gain - $24,000 loss - $1,000 long-term loss carryover). The long-term loss carryover of $1,000 belongs in the 28% basket, regardless of its basket in the prior year. The net loss in the 28% basket is first applied to the long-term gain in the 15% basket. The netting reduces the 15% basket to zero and a net loss of $3,000 remains in the 28% basket. The $2,200 short-term capital loss carryover is included in the short-term calculation for the current year. The net short-term capital loss for 2019 is $5,200 ($10,000 gain - $13,000 loss - $2,200 carryover). The short-term capital loss is applied against ordinary income up to a limit of $3,000 and a $2,200 net short-term capital loss then remains.

Starr, a self-employed individual, purchased a piece of equipment for use in Starr's business. The costs associated with the acquisition of the equipment were: Purchase price $55,000 Delivery charges $725 Installation fees $300 Sales tax $3,400 What is the depreciable basis of the equipment? a. $55,000 b. $58,400 c. $59,125 d. $59,425

correct answer: d. $59,425 Initial basis in purchased property is the cost of acquiring it, which includes (1) stated purchase price, (2) closing costs (e.g., brokerage commissions, pre-purchase taxes, sales tax on purchase, title transfer taxes, title insurance, recording fees, attorney fees, document review and preparation), and (3) miscellaneous costs (e.g., appraisal fees, freight, installation, testing). Starr's depreciable basis of the equipment is $59,425 [$55,000 purchase price + $725 delivery charges (miscellaneous costs) + $300 installation fees (miscellaneous costs) + $3,400 sales tax (closing cost)].

In Year 1, Betty Lane bought 100 shares of a listed corporation's stock for $8,000. In Year 4, Betty sold this stock for $15,000. Betty had no other capital gains or losses in Year 4. How much of the Year 4 long-term capital gain should be included in Betty's Year 4 gross income? a. $2,800 b. $3,500 c. $4,200 d. $7,000

correct answer: d. $7,000 Gain is any excess of the amount realized over adjusted basis. All $7,000 ($15,000 - $8,000) of gain realized is currently recognized unless an exception applies.

Which of the following is a capital asset? a. Inventory held primarily for sale to customers. b. Accounts receivable. c. A computer system used by the taxpayer in a personal accounting business. d. Land held as an investment.

correct answer: d. Land held as an investment. All property is classified as a capital asset unless specifically excluded. Accounts receivable, inventory, and depreciable property or real estate used in a business are not capital assets. Land held as an investment, however, is a capital asset unless it is held by a dealer (the general rule and not an exception is being tested).

In Year 1, Paul received a boat as a gift from his father. At the time of the gift, the boat had a fair market value of $60,000 and an adjusted basis of $80,000 to Paul's father. After Paul received the boat, nothing occurred affecting Paul's basis in the boat. In Year 3, Paul sold the boat for $75,000. What is the amount and character of Paul's gain? a. Ordinary income of $15,000. b. Long-term capital gain of $15,000. c. Long-term capital loss of $5,000. d. Neither a gain nor a loss.

correct answer: d. Neither a gain nor a loss. For determining gain on the sale of property acquired by gift, the basis is the donor's adjusted basis. Paul's sale results in no gain ($75,000 sales price - $80,000 basis). For determining loss on the sale of property acquired by gift, the basis may not exceed the fair market value of the property at the date of the gift. Thus, there is no loss ($75,000 sales price - $60,000 basis).

Mary Brown purchased an apartment building on January 1, 2010, for $200,000. The building was depreciated using the straight-line method. On December 31, 2020, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $160,000. On her 2020 tax return, Brown should report a. Section 1231 gain of $10,000 and ordinary income of $40,000. b. Section 1231 gain of $40,000 and ordinary income of $10,000. c. Ordinary income of $50,000. d. Section 1231 gain of $50,000.

correct answer: d. Section 1231 gain of $50,000. When depreciable property used in a trade or business is sold at a gain, first Sec. 1245 and Sec. 1250 are applied; then the balance of the gain not recaptured as ordinary income is Sec. 1231 gain. In this case, Sec. 1245 does not apply, and Sec. 1250 recapture is limited to the excess of accelerated depreciation over straight-line depreciation. Since the building was depreciated using the straight-line method, the entire $50,000 gain ($210,000 - $160,000) is Sec. 1231 gain, $40,000 of which is attributable to straight-line depreciation and taxed at the maximum Sec. 1250 unrecaptured gains rate of 25%.