Deck 11: Property Dispositions

Question 1

The gain or loss realized on the sale of an asset is always recognized for tax purposes.

Answer 1

False

Question 2

§1250 recaptures the excess of accelerated depreciation over straight line depreciation on real property placed in service between 1981 and 1986 as ordinary income.

Answer 2

True

Question 3

After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary.

Answer 3

True

Question 4

Assets held for investment and personal use assets are examples of capital assets.

Question 5

All tax gains and losses are ultimately characterized as either ordinary or capital.

Question 6

The amount realized is the sale proceeds less the adjusted basis.

Question 7

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent.

Question 8

Unrecaptured §1250 gains apply only to individuals.

Question 9

For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

Question 10

The gain or loss realized on the sale of an asset is the amount realized less the adjustedbasis.

Question 11

Accounts receivable and inventory are examples of ordinary assets.

Question 12

Only accelerated depreciation is recaptured for §1245 assets.

Question 13

Generally, the amount realized is everything of value received in a sale less sellingexpenses.

Question 14

Taxpayers can recognize a taxable gain on the sale of an asset even though an asset's real economic value has declined.

Question 15

A parcel of land is always a capital asset.

Question 16

Depreciation recapture changes both the amount and character of a gain.

Question 17

§1231 assets include all assets used in a trade or business.

Question 18

The adjusted basis is the cost basis less cost recovery deductions.

Question 19

An asset's tax adjusted basis is usually greater than its book adjusted basis.

Question 20

Ordinary gains and losses are obtained on the sale of investments.

Question 21

A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital gain.

Question 22

A simultaneous exchange must take place for a transaction to qualify as a like-kind exchange.

Question 23

An installment sale is any sale where at least a portion of the sales proceeds is received in a subsequent taxable year.

Question 24

Residential real property is not like-kind with non-residential real property.

Question 25

In a deferred like-kind exchange the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

Question 26

Realized gains are recognized unless there is specific exception.

Question 27

Which of the following is not used in the calculation of the amount realized:

A) Buyer's assumption of liabilities.
B) Adjusted basis.
C) Cash.
D) Fair market value of other property received.
E) All of the choices are used.

Question 28

A loss realized for property destroyed in a hurricane is deferred under the involuntary conversion rules.

Question 29

Which of the following is not true regarding an asset's adjusted basis?

A) Tax adjusted basis is usually greater than book adjusted basis.
B) Adjusted basis is cost basis less cost recovery deductions.
C) Tax adjusted basis may change over time.
D) Tax adjusted basis is usually less than book adjusted basis.

Question 30

Which of the following is not usually included in an asset's tax basis?

A) Shipping costs
B) Sales tax
C) Installation costs
D) Purchase price
E) None of the choices are correct.

Question 31

The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last 5 years.

Question 32

§1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.

Question 33

A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized.

Question 34

For a like-kind exchange, realized gain is deferred if the exchange is solely for like-kind property.

Question 35

Which of the following realized gains results in a recognized gain?

A) Iowa cropland exchanged for a Minnesota warehouse.
B) Involuntary conversion.
C) Sale to a related party.
D) Farm machinery traded for farm machinery.

Question 36

Which of the following is how gain or loss realized is calculated?

A) Cash less cost recovery.
B) Amount realized less adjusted basis.
C) Cost basis less cost recovery.
D) Cash less selling costs.
E) None of the choices are correct.

Question 37

Boot is not like-kind property involved in a like-kind exchange.

Question 38

For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized.

Question 39

Losses on sales between related parties are realized but not recognized.

Question 40

The §1231 look-back rule applies whether there is a net gain or loss.

Question 41

Which of the following does not ultimately result in a capital gain or loss?

A) Gain on equipment used in a trade or business held for more than one year, if it is the only asset sale during the year.
B) Sale of inventory.
C) Sale of a personal use asset.
D) Sale of capital stock in another company.
E) None of the choices are correct.

Question 42

The sale of land held for investment results in the following type of gain or loss?

A) Capital.
B) Ordinary.
C) §1245.
D) §1231.
E) None of the choices are correct.

Question 43

Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains?

A) §1239.
B) §1245.
C) §291.
D) Unrecaptured §1250 gains.
E) None of the choices are correct.

Question 44

Which of the following transactions results solely in §1245 gain?

A) Sale of land held for more than one year and where the amount realized exceeds the adjusted basis.
B) Sale of machinery held for more than one year and where the accumulated depreciation exceeds the gain realized.
C) Sale of machinery held for less than one year.
D) Sale of machinery held for more than one year and where the gain realized exceeds the accumulated depreciation.
E) None of the choices are correct.

Question 45

Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

A) $20,000 ordinary gain, and $5,000 §1231 gain.
B) $25,000 capital gain.
C) $25,000 §1231 gain.
D) $5,000 ordinary gain, and $20,000 §1231 gain.
E) None of the choices are correct.

Question 46

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?

A) §1245.
B) Capital.
C) §1231.
D) §291.
E) None of the choices are correct.

Question 47

Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain?

A) $9,500 §1245.
B) $9,500 §1231.
C) $9,500 §1250.
D) $9,500 §1221.
E) None of the choices are correct.

Question 48

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for$55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

A) $7,500 §1231 loss.
B) $5,000 §1231 loss.
C) $7,500 capital gain.
D) $7,500 ordinary gain.
E) None of the choices are correct.

Question 49

The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss?

A) Ordinary only.
B) §1245 and §1231.
C) Capital and §1231.
D) Capital and Ordinary.
E) None of the choices are correct.

Question 50

Which of the following is not a §1245 asset if held for more than one year?

A) Business cell phone.
B) Machinery.
C) Land.
D) Automobile.
E) None of the choices are correct.

Question 51

What is the character of land used in an active trade or business for two years?

A) Investment.
B) Ordinary.
C) §1231.
D) Capital.
E) None of the choices are correct.

Question 52

Which of the following results in an ordinary gain or loss?

A) Sale of a §1231 asset.
B) Sale of a machine at a gain.
C) Sale of inventory.
D) Sale of stock held for investment.
E) None of the choices are correct.

Question 53

Which of the following is true regarding depreciation recapture?

A) Changes the character of a loss.
B) Changes the character of a gain.
C) Only applies to ordinary assets.
D) Changes the amount of a gain.
E) None of the choices are correct.

Question 54

Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg's gain or loss realized on the machine?

A) $1,200 loss.
B) $1,400 loss.
C) $800 gain.
D) $1,000 gain.
E) None of the choices are correct.

Question 55

Bateman Corporation sold an office building that it used in its business for $800,000.Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

A) $200,000 ordinary and $200,000 §1231 gain.
B) $400,000 ordinary gain.
C) $40,000 ordinary and $360,000 §1231 gain.
D) $400,000 capital gain.
E) None of the choices are correct.

Question 56

Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

A) $75,000 capital gain.
B) $25,000 ordinary and $50,000 unrecaptured §1250 gain.
C) $75,000 ordinary gain.
D) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.
E) None of the choices are correct.

Question 57

The sale of computer equipment used in a trade or business for 9 months results in the following type of gain or loss?

A) Ordinary.
B) §1231.
C) §1245.
D) Capital.
E) None of the choices are correct.

Question 58

Which of the following gains does not result solely in an ordinary gain or loss?

A) Sale of equipment where the accumulated depreciation exceeds the gain realized.
B) Sale of equipment where the gain realized exceeds the accumulated depreciation.
C) Sale of inventory.
D) Sale of equipment held for less than a year.
E) None of the choices are correct.

Question 59

Sumner sold equipment that it uses in its business for $30,000. Sumner bought theequipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

A) $10,000 §1231 loss.
B) $10,000 capital loss.
C) $10,000 §1245 loss.
D) $50,000 ordinary loss.
E) None of the choices are correct.

Question 60

Which of the following sections does not recapture or recharacterize a taxpayer's gain?

A) §1250.
B) §1239.
C) §291.
D) §1245.
E) None of the choices are correct.

Question 61

The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:

A) The basis is equal to the cost basis of the old property.
B) The basis is equal to the adjusted basis of the old property.
C) The basis is equal to the fair market value of the new property.
D) The basis is equal to the fair market value of the old property.
E) All of the choices are correct.

Question 62

Which of the following is not an involuntary conversion?

A) Fire damage.
B) A foreclosure.
C) Destruction caused by a hurricane.
D) Imminent domain.
E) All of the choices could be involuntary conversions.

Question 63

Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery. Arlington originally purchased the machinery for $60,000 and it had anadjusted basis of $28,000 at the time of the exchange. The new machinery had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's gain or loss recognized on the exchange?

A) $9,000.
B) $7,000.
C) $2,000.
D) $0.
E) None of the choices are correct.

Question 64

Which one of the following is not true regarding a like-kind exchange?

A) Securities can be like-kind with any other securities.
B) Losses on boot given are not recognized.
C) Loss on like-kind property is not recognized.
D) Gains on boot given are deferred.
E) All of the choices are true.

Question 65

Mary traded furniture used in her business to a furniture dealer for some new furniture.Mary originally purchased the furniture for $45,000 and it had an adjusted basis of$20,000 at the time of the exchange. The new furniture had a fair market value of$40,000. Mary also gave $4,000 to the dealer in the transaction. What is Mary's adjusted basis in the new furniture after the exchange?

A) $36,000.
B) $24,000.
C) $40,000.
D) $20,000.
E) None of the choices are correct.

Question 66

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,00065o) f losses within the last 5 years. Brandon owned each of the assets for several years. In the currentyear, Brandon sold the following business assets: Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

A) $25,000 §1231 gain and $3,750 tax liability.
B) $12,000 §1231 gain, $13,000 ordinary income, and $6,350 tax liability.
C) $25,000 ordinary income, $8,750 tax liability.
D) $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability.
E) None of the choices are correct.

Question 67

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?

A) To help acquire the replacement property.
B) To prevent the seller from receiving cash (boot) that will taint the transaction.
C) To certify the taxpayer's Form 8824.
D) To facilitate finding replacement property.
E) All of the choices are correct.

Question 68

Which one of the following is not a requirement of a deferred like-kind exchange?

A) The exchanged property must be like-kind.
B) The exchange must be completed within the taxable year.
C) The like-kind property must be received within 180 days.
D) The like-kind property to be received must be identified within 45 days.
E) All of the choices are correct.

Question 69

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000.Beta used the machinery in its business. Alpha bought the machinery a few years ago for$50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

A) $20,000 ordinary gain.
B) $20,000 ordinary income under §1239.
C) $20,000 capital gain.
D) $10,000 ordinary gain and $10,000 §1231 gain.
E) None of the choices are correct.

Question 70

Koch traded machine 1 for machine 2. Koch originally purchased machine 1 for $75,000 and machine 1's adjusted basis was $40,000 at the time of the exchange. Machine 2'sseller purchased it for $65,000 and machine 2's adjusted basis was $55,000 at the time of the exchange. What is Koch's adjusted basis in machine 2 after the exchange?

A) $55,000.
B) $50,000.
C) $40,000.
D) $75,000.
E) None of the choices are correct.

Question 71

Why does §1250 recapture generally no longer apply?

A) Because unrecaptured §1250 gains now apply to all taxpayers instead.
B) §1245 recapture trumps §1250 recapture.
C) The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method.
D) Congress repealed the code section.
E) None of the choices are correct.

Question 72

Each of the following is true except for:

A) An indirect involuntary conversion occurs when property is destroyed and insurance proceeds are used to purchase qualified replacement property.
B) Qualified replacement property rules are more restrictive than the like-kind property rules.
C) Losses realized in involuntary conversions are deferred.
D) A direct involuntary conversion occurs when property taken under imminent domain is replaced with other property.
E) All of the choices are true.

Question 73

Which of the following is true regarding the §1231 look-back rule?

A) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years.
B) It only applies when a §1231 loss occurs.
C) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 gain in the prior five years.
D) It only applies when a §1231 gain occurs.
E) None of the choices are correct.

Question 74

Ashburn reported a $105,000 net §1231 gain in year 6. Assuming Ashburn reported$60,000 of nonrecaptured §1231 losses during years 1-5, what amount of Ashburn's net§1231 gain for year 6, if any, is treated as ordinary income?

A) $105,000.
B) $45,000.
C) $60,000.
D) $0.
E) None of the choices are correct.

Question 75

When does unrecaptured §1250 gains apply?

A) When the taxpayer makes the election.
B) It applies only when real property purchased before 1986 is sold at a gain.
C) It applies when §1245 recapture trumps §1250 recapture.
D) It applies only when non-corporate taxpayers sell depreciable real property at a gain.
E) None of the choices are correct.

Question 76

Which of the following is not true regarding §1239?

A) It only applies to gains on sales of depreciable property.
B) It does not apply to losses.
C) It only applies to gains on sales of non-residential real property.
D) It only applies to related taxpayers.
E) None of the choices are correct.

Question 77

Brandon, an individual, began business four years ago and has never sold a §1231 asset. Bra6n4d)on owned each of the assets for several years. In the current year, Brandon sold the followingbusiness assets: Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

A) $7,000 ordinary income, $1,000 §1231 loss and $2,100 tax liability.
B) $7,000 §1231 gain and $1,050 tax liability.
C) $6,000 ordinary income and $2,100 tax liability.
D) $7,000 §1231 gain and $2,450 tax liability.
E) None of the choices are correct.

Question 78

How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange?

A) The like-kind property to be received must be identified within 180 days.
B) There is no deadline for the identification of replacement property.
C) The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year.
D) The like-kind property to be received must be identified within 45 days.
E) All of the choices are correct.

Question 79

Which one of the following is not considered boot in a like-kind exchange?

A) Cash.
B) Mortgage given.
C) Other property.
D) Mortgage received.
E) All of the choices can be considered as boot.

Question 80

Winchester LLC sold the following business assets during the current year: (1)automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery,$25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process? Assume all assets were held for more than one year.

A) $7,000 ordinary gain, $10,000 §1231 loss.
B) $1,000 ordinary gain, $4,000 §1231 loss.
C) $7,000 ordinary loss, $4,000 §1231 gain.
D) $3,000 ordinary loss, $0 §1231 loss.
E) None of the choices are correct.