Deck 14: Property Transactions: Determination of Gain or Loss and Basis Considerations

Question 1

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Answer 1

True

Question 2

If the buyer assumes the seller's liability on the property acquired,the seller's amount realized is decreased by the amount of the liability assumed.

Answer 2

False

Question 3

A realized gain on the sale or exchange of a personal use asset is recognized,but a realized loss on the sale,exchange,or condemnation of a personal use asset is not recognized.

Answer 3

True

Question 4

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium.On the later sale of the bond for $10,800,she has amortized $300 of the premium.Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).

Question 5

If insurance proceeds are received for property used in a trade or business,a casualty transaction can result in recognized gain or recognized loss.

Question 6

A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Question 7

Reggie owns all the stock of Amethyst,Inc.(adjusted basis of $80,000).If he receives a distribution from Amethyst of $70,000 and corporate earnings and profits are $18,000,Reggie has a capital gain of $8,000 and an adjusted basis for his Amethyst stock of $0.

Question 8

Monroe's delivery truck is damaged in an accident.Monroe's adjusted basis for the delivery truck prior to the accident is $20,000.If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000,his adjusted basis for the delivery truck after the accident is $21,000.

Question 9

If Wal-Mart stock increases in value during the tax year by $4,500,the amount realized is a positive $4,500.

Question 10

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits,the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Question 11

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Question 12

Molanda sells a parcel of land for $25,000 in cash and the buyer assumes Molanda's mortgage of $20,000 on the land.Molanda's amount realized is $45,000.

Question 13

The adjusted basis of property that is stolen is reduced by the amount of insurance proceeds received and by any recognized loss.

Question 14

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Question 15

If a seller assumes the buyer's liability on the property acquired,the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Question 16

Jesse purchases land and an office building for his business for $200,000 with $50,000 being allocated to the land.During the first year,Jesse deducts cost recovery of $3,050.Jesse's adjusted basis for the building at the end of the first year is $146,950 ($150,000 - $3,050).

Question 17

The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the recipient's stock basis is treated as an ordinary gain.

Question 18

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made.The amount of the amortized premium is treated as an interest deduction.

Question 19

A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Question 20

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Question 21

If the alternate valuation date is elected by the executor in 2012,the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

Question 22

For the loss disallowance provision under § 267,related parties include certain family members,a shareholder and his or her controlled corporation (i.e.,greater than 50% in value of the corporation's outstanding stock),and a partner and his or her controlled partnership (i.e.,greater than 50% of the capital interests or profits interest in the partnership).

Question 23

The basis of property received by gift is always a carryover basis.

Question 24

Nontaxable stock dividends result in no change to the total basis of the old and new stock,but the basis per share decreases.

Question 25

The basis of property acquired in a bargain purchase is the cost of the asset.The bargain amount (fair market value - cost)is recognized when the asset is sold.

Question 26

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold,he should use either a weighted average approach or a LIFO approach.

Question 27

On the sale of property between related parties,realized gains are recognized whereas realized losses are disallowed.

Question 28

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Question 29

The holding period of nontaxable stock rights includes the holding period of the stock on which the rights were distributed.

Question 30

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Question 31

If the fair market value of the property on the date of death is greater than on the alternate valuation date,the use of the alternate valuation amount is mandatory.

Question 32

A donee receives depreciable property worth $85,000 (basis to donor of $150,000)with no gift tax being paid on the transfer.The donee's basis for depreciation purposes is $85,000.

Question 33

Parker bought a brand new Ferrari on January 1,2012,for $125,000.Parker was fatally injured in an auto accident on June 23,2012,when the fair market value of the car was $105,000.Parker was driving a loaner car from the Ferrari dealership while his car was being serviced.In his will,Parker left the Ferrari to his best friend,Ryan.Ryan's holding period for the Ferrari begins on June 23,2012.

Question 34

Purchased goodwill is assigned a basis equal to cost,and developed or self-created goodwill is assigned a basis equal to one-fifteenth of the amount expended.

Question 35

If a husband inherits his deceased wife's share of jointly owned property in a common law state,both the husband's original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife's death.

Question 36

If losses are disallowed in a related party transaction,the holding period for the buyer includes the holding period of the seller.

Question 37

The holding period for property acquired by gift is automatically long term.

Question 38

Cassie purchases a sole proprietorship for $145,000.The fair market value of the tangible assets is $110,000 and the agreed to value of goodwill is $10,000.Assuming there are no other intangible assets,Cassie's basis for the tangible assets is $132,917 ($110,000 + $22,917)and her basis for the goodwill is $12,083 ($10,000 + $2,083).

Question 39

This year,Fran receives a birthday gift of stock worth $75,000 from her aunt.The aunt has owned the stock (adjusted basis $50,000)for 10 years and pays gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000)or $75,000.

Question 40

If the alternate valuation date is elected by the executor of the estate,the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.

Question 41

Gene purchased an SUV for $42,000 which he uses 100% for personal purposes.When the SUV is worth $29,000,he contributes it to his business.The gain basis is $42,000,the loss basis is $29,000,and the basis for cost recovery is $29,000.

Question 42

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange,the taxpayer acquires substantially identical stock.

Question 43

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000.If the property is going to be given to Stuart's nephew,Alex,it is preferable for the transfer to be by inheritance rather than by gift.

Question 44

On February 2,2012,Karin purchases real estate for $375,000.The annual property taxes of $5,000 are payable on December 31.Realizing that she will pay the property taxes for the entire year,Karin remits $374,575 to the seller at closing.Karin's adjusted basis for the real estate is:

A) $374,575.
B) $375,000.
C) $375,425.
D) $379,575.
E) None of the above.

Question 45

Ben sells stock (adjusted basis of $25,000)to his son,Ray,for its fair market value of $15,000.Ray gives the stock to his daughter,Trish,who subsequently sells it for $26,000.Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Question 46

Carlton purchases land for $550,000.He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase.He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential.He subdivides the land and installs streets and sewers at a cost of $800,000.What is Carlton's basis for the land and the improvements?

A) $1,350,000.
B) $1,378,000.
C) $1,385,000.
D) $1,413,000.
E) None of the above.

Question 47

Pedro borrowed $125,000 to purchase a machine costing $150,000.He later borrowed an additional $25,000 using the machine as collateral.Both notes are nonrecourse.Eight years later,the machine has an adjusted basis of zero and two outstanding note balances of $115,000 and $21,000.Pedro sells the machine subject to the two liabilities for $27,000.What is his realized gain or loss?

A) $0.
B) $27,000.
C) $136,000.
D) $163,000.
E) None of the above.

Question 48

The bank forecloses on Lisa's apartment complex.The property had been pledged as security on a nonrecourse mortgage,whose principal amount at the date of foreclosure is $750,000.The adjusted basis of the property is $480,000,and the fair market value is $750,000.What is Lisa's recognized gain or loss?

A) $270,000.
B) ($750,000).
C) $0.
D) ($480,000).
E) None of the above.

Question 49

Capital recoveries include:

A) The cost of capital improvements.
B) Ordinary repair and maintenance expenditures.
C) Payments made on the principal of a mortgage on taxpayer's building.
D) Amortization of bond premium.
E) All of the above.

Question 50

Alice owns land with an adjusted basis of $610,000,subject to a mortgage of $350,000.Real estate taxes are $9,000 per calendar year and are payable on December 31.On April 1,2012,Alice sells her land subject to the mortgage for $650,000 in cash,a note for $600,000,and property with a fair market value of $120,000.What is the amount realized?

A) $1,370,000.
B) $1,372,219.
C) $1,720,000.
D) $1,722,219.
E) None of the above.

Question 51

Since wash sales do not apply to gains,it may be desirable to engage in this type of transaction before the end of the tax year.

Question 52

The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

Question 53

Broker's commissions,legal fees,and points paid by the seller reduce the seller's amount realized.

Question 54

If property that has been converted from personal use to business use has appreciated in value,its basis for gain will be the same as the basis for loss.

Question 55

The basis of property acquired in a wash sale is its cost plus the loss recognized on the wash sale.

Question 56

Albert purchased a tract of land for $140,000 in 2009 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000.Highway engineers surveyed the property and indicated that he would probably get $180,000.The highway project was abandoned in 2012 and the value of the land fell to $100,000.What is the amount of loss Albert can claim in 2012?

A) $40,000.
B) $60,000.
C) $80,000.
D) $100,000.
E) None of the above.

Question 57

The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000.If the stock or cash is going to be given to her niece,it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece.The same preference would exist if the recipient were a qualified charitable organization.

Question 58

Jamie bought her house in 2007 for $395,000.Since then,she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing.She sells the house on July 1,2012.Her realtor charged $34,700 in commissions.Prior to listing the house with the realtor,she spent $300 advertising in the local newspaper.Sammy buys the house for $500,000 in cash,assumes her mortgage of $194,000,and pays property taxes of $4,200 for the entire year on December 1,2012.What is Jamie's adjusted basis at the date of the sale and the amount realized?

A) $370,000 adjusted basis; $661,400 amount realized.
B) $370,000 adjusted basis; $661,100 amount realized.
C) $370,000 adjusted basis; $665,200 amount realized.
D) $325,000 adjusted basis; $663,200 amount realized.
E) $325,000 adjusted basis; $694,000 amount realized.

Question 59

Alicia buys a beach house for $425,000 which she uses as her personal vacation home.She builds an additional room on the house for $45,000.She sells the property for $510,000 and pays $30,000 in commissions and $4,000 in legal fees in connection with the sale.What is the recognized gain or loss on the sale of the house?

A) $0.
B) $6,000.
C) $30,000.
D) $40,000.
E) None of the above.

Question 60

Ashley sells real property for $280,000.The buyer pays $4,000 in property taxes that had accrued during the year while the property was still legally owned by Ashley.In addition,Ashley pays $14,000 in commissions and $3,000 in legal fees in connection with the sale.How much does Ashley realize (the amount realized)from the sale of her property?

A) $259,000.
B) $263,000.
C) $267,000.
D) $280,000.
E) None of the above.

Question 61

Steve purchased his home for $500,000.As a sole proprietor,he operates a certified public accounting practice in his home.For this business,he uses one room exclusively and regularly as a home office.In Year 1,$3,042 of depreciation expense on the home office was deducted on his income tax return.In Year 2,Steve sustained losses in his business; therefore,no depreciation was taken on the home office.Had he been allowed to deduct depreciation expense,his depreciation expense would have been $3,175.What is the adjusted basis in the home?

A) $493,783.
B) $496,825.
C) $496,958.
D) $500,000.
E) None of the above.

Question 62

Noelle owns an automobile which she uses for personal use.Her adjusted basis is $45,000 (i.e.,the original cost).The car is worth $22,000.Which of the following statements is correct?

A) If Noelle sells the car for $22,000, her realized loss of $23,000 is not recognized.
B) If Noelle exchanges the car for another car worth $22,000, her realized loss of $23,000 is not recognized.
C) If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $23,000.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Question 63

Katie sells her personal use automobile for $15,000.She purchased the car four years ago for $31,000.What is Katie's recognized gain or loss?

A) $0.
B) $15,000.
C) ($16,000).
D) ($31,000).
E) None of the above.

Question 64

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000).Of the insurance proceeds of $360,000 she receives,Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit.She received only $360,000 because of a co-insurance clause in her insurance policy.What is Joyce's recognized gain or loss?

A) $0.
B) $10,000 loss.
C) $10,000 gain.
D) $40,000 gain.
E) None of the above.

Question 65

Mona purchased a business from Judah for $1,000,000.Judah's records and an appraiser provided her with the following information regarding the assets purchased: What is Mona's adjusted basis for the land,building,and equipment?

A) Land $270,000, building $450,000, equipment $180,000.
B) Land $195,000, building $575,000, equipment $230,000.
C) Land $195,000, building $310,000, equipment $95,000.
D) Land $270,000, building $521,429, equipment $208,571.
E) None of the above.

Question 66

Khalid sells two personal use assets during the taxable year.A gain of $6,000 is realized on the sale of one asset and a loss of $2,000 is realized on the sale of the other asset.What is the recognized gain or loss?

A) $0.
B) $4,000.
C) $6,000.
D) ($2,000).
E) None of the above.

Question 67

Milton owns a bond (face value of $25,000)for which he paid $28,000.Which of the following statements is correct?

A) If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life.
B) The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is deducted as interest.
C) If the bond is tax-exempt, Milton can elect to amortize the $3,000 premium over the remaining life of the bond.
D) The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount cannot be deducted as interest.
E) None of the above is correct.

Question 68

Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $12,000.The current earnings and profits are $25,000.Elvis' basis for his stock is $290,000.He receives a distribution of $340,000 on the last day of the tax year.How much dividend income and/or capital gain should Elvis report?

A) $0.
B) Dividend income of $13,000 and capital gain of $37,000.
C) Dividend income of $25,000 and capital gain of $25,000.
D) Dividend income of $0 and capital gain of $50,000.
E) None of the above.

Question 69

Which of the following is correct?

A) Realized gains are always recognized and realized losses are never recognized.
B) Realized gains and realized losses on the sale of personal use assets are not recognized.
C) Realized gains and realized losses on the sale of personal use assets are recognized.
D) Only a. and b. are correct.
E) None of the above.

Question 70

Etta received nontaxable stock rights on October 3,2012.She allocated $12,000 of the $30,000 basis for the associated stock to the stock rights.The stock rights are exercised on November 8,2012.The exercise price for the stock is $42,000.What is Etta's basis for the acquired stock?

A) $12,000.
B) $42,000.
C) $54,000.
D) $72,000.
E) None of the above.

Question 71

Alvin is employed by an automobile dealership as its manager.As such,he purchased an SUV for $32,000 (fair market value is $48,000).No other employees are permitted a discount.What is Alvin's basis in the SUV?

A) $16,000.
B) $32,000.
C) $48,000.
D) $80,000.
E) None of the above.

Question 72

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share.Two years later,he receives a 5% common stock dividend.At that time,the common stock of Purple Corporation had a fair market value of $12.50 per share.What is the basis of the Purple Corporation stock,the per share basis,and gain recognized upon receipt of the common stock dividend?

A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
E) None of the above.

Question 73

In 2008,Harold purchased a classic car that he planned to restore for $12,000.However,Harold is too busy to work on the car and he gives it to his daughter Julia in 2012.At this time,the fair market value of the car has declined to $10,000.Harold paid no gift tax on the transaction.Julia completes some of the restoration herself with out-of-pocket costs of $5,000.She later sells the car for $30,000.What is Julia's recognized gain or loss on the sale of the car?

A) $0.
B) $13,000.
C) $15,000.
D) $18,000.
E) None of the above.

Question 74

Which of the following statements is false?

A) A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
B) A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
C) A realized loss that is never recognized results in the permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
D) A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer's cost or other basis for tax purposes.
E) All of the above.

Question 75

Mike's basis in his stock in Tan Corporation is $75,000.He receives nontaxable stock rights (fair market value of $20,000)when the value of the stock is $100,000.What is the basis for the stock rights?

A) $0.
B) $12,500.
C) $15,000.
D) The basis is $0 unless the taxpayer elects to allocate a portion of the cost of the stock to the rights.
E) None of the above.

Question 76

Which of the following statements is correct?

A) Under no circumstances does part of the stock basis have to be allocated to nontaxable stock rights.
B) If the fair market value of stock rights is equal to at least 15% of the fair market value of the stock, part of the stock basis must be allocated to nontaxable stock rights.
C) An election may be made to allocate part of the stock basis to nontaxable stock rights only if the fair market value of the nontaxable stock rights is at least 15% of the fair market value of the stock.
D) Only b. and c. are correct.
E) Only a. and c. are correct.

Question 77

Sandra's automobile,which is used exclusively in her trade or business,was damaged in an accident.The adjusted basis prior to the accident was $11,000.The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000.Insurance proceeds of $3,200 are received.What is Sandra's adjusted basis for the automobile after the casualty?

A) $0.
B) $7,000.
C) $7,800.
D) $10,200.
E) None of the above.

Question 78

Nontaxable stock dividends result in:

A) A higher cost per share for all shares than before the stock dividend.
B) A lower cost per share for all shares than before the stock dividend.
C) An increase in the total cost of the old and new stock combined.
D) A decrease in the total cost of the old and new stock combined.
E) None of the above.

Question 79

Karen owns City of Richmond bonds with a face value of $10,000.She purchased the bonds on January 1,2012,for $11,000.The maturity date is December 31,2021.The annual interest rate is 8%.What is the amount of taxable interest income that Karen should report for 2012,and the adjusted basis for the bonds at the end of 2012,assuming straight-line amortization is appropriate?

A) $0 and $11,000.
B) $0 and $10,900.
C) $100 and $11,000.
D) $100 and $10,900.
E) None of the above.

Question 80

Over the past 20 years,Alfred has purchased 380 shares of Green,Inc.,common stock.His first purchase was in 1991 when he acquired 30 shares for $20 a share.In 1996,Alfred bought 150 shares at $10 a share.In 2011,Alfred acquired 200 shares at $50 a share.Alfred intends to sell 125 shares at $60 per share in the current year.If Alfred's objective is to minimize gain,what is his recognized gain?

A) $1,250.
B) $3,520.
C) $5,950.
D) $6,250.
E) None of the above.