Question 1

A taxpayer purchased an asset for $50,000 several years ago.He is now planning to sell it.Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.

Accepted Answer

True

Question 2

Rick sells stock of Ty Corporation,which has an adjusted basis of $20,000,for $22,000.He pays a sales commission of $500.In computing his gain or loss,the amount realized by Rick is $1,500.

Accepted Answer

The amount realized by Rick would be $21,500 ($22,000 - $500 commission), not $1,500. To compute his gain or loss, you would subtract the adjusted basis of $20,000 from the amount realized of $21,500, resulting in a gain of $1,500.

Question 3

Jordan paid $30,000 for equipment two years ago and has claimed total depreciation deductions of $15,600 for the two years.The cost of repairs during the same time period was $2,000 while a major overhaul which extended the life of the equipment cost $7,000.What is Jordan's adjusted basis in the equipment at the end of the two-year period?

Accepted Answer

Jordan's adjusted basis can be calculated as follows: 
Adjusted basis = Cost of equipment - total depreciation deductions + cost of repairs + cost of major overhaul 
Adjusted basis = $30,000 - $15,600 + $2,000 + $7,000 
Adjusted basis = $23,400 
Therefore, Jordan's adjusted basis in the equipment at the end of the two-year period is $23,400. Option C is the correct answer.

Question 4

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.

Accepted Answer

Expenditures which do not add to the value or prolong the life of property, such as repairs or maintenance, may be expensed in the year in which they are incurred. This is known as a revenue expense.

Question 5

Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Accepted Answer

There are five different capital gain tax rates that apply to long-term capital assets sold by noncorporate taxpayers, depending on their income level and the type of asset being sold. These rates range from 0% to 20%.

Question 6

Richard exchanges a building with a basis of $35,000,and subject to a liability of $25,000,for land with a FMV of $50,000 owned by Bill.Bill takes the building subject to the liability.What is the amount of Richard's realized gain?

Accepted Answer

The answer of Richard exchanges a building with a basis...

Question 7

If Houston Printing Co.purchases a new printing press during the current year for $30,000,pays sales taxes of $2,000,and pays $1,000 for installation,the cost basis for the printing press is $33,000.

Accepted Answer

The cost basis for an asset includes the purchase price, sales taxes, and installation costs, so the cost basis for the printing press would be $33,000.

Question 8

Michelle purchased her home for $150,000,and subsequently added a garage costing $25,000 and a new porch costing $5,000.Repairs to the home's plumbing cost $1,000.The adjusted basis in the home is

Accepted Answer

The answer of Michelle purchased her home for $150,000,and subsequently...

Question 9

A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000.The taxpayer has a realized gain of $3,000.

Accepted Answer

The realized gain is calculated by subtracting the basis ($25,000) from the amount received from the sale ($28,000), resulting in a gain of $3,000.

Question 10

Which one of the following does not affect the adjusted basis of a house held as rental property?

Accepted Answer

Painting of more than 50% of the rooms in the home is considered a routine maintenance and repair expense and does not affect the adjusted basis of the property. Depreciation deduction, adding a new room to the house, and installation of a completely new heating system are all capital improvements that increase the adjusted basis of the property.

Question 11

Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.

Accepted Answer

Losses that are incurred in carrying on a trade or business or incurred in an activity engaged in for profit are generally deductible. This includes losses from operations, casualty and theft losses, and losses from the sale or exchange of property used in the trade or business. However, there are certain limitations and rules for deducting losses that may apply, such as the at-risk rules and passive activity loss rules.

Question 12

Gains and losses are recognized when property is disposed of by gift or bequest.

Accepted Answer

The answer of Gains and losses are recognized when property...

Question 13

Will exchanges a building with a basis of $35,000,and subject to a liability of $30,000,for land with a FMV of $50,000 owned by Jane.Jane takes the land subject to the liability.The amount realized by Will is

Accepted Answer

The answer of Will exchanges a building with a basis...

Question 14

Courtney sells a cottage at the lake that the family had used for their summer vacations.The purchaser paid Courtney $100,000 and assumed the mortgage which had a principal balance of $50,000.Courtney had purchased the cottage five years ago for $170,000.Courtney will recognize

Accepted Answer

The answer of Courtney sells a cottage at the lake...

Question 15

On January 1 of this year,Brad purchased 100 shares of stock at $4,000.By December 31 of this year,the stock had declined in value to $2,200,but Brad still held the shares.Brad has realized a $1,800 loss for tax purposes this year.

Accepted Answer

The answer of On January 1 of this year,Brad purchased...

Question 16

All recognized gains and losses must eventually be classified either as capital or ordinary.

Accepted Answer

This is true. Ultimately, all gains and losses will be categorized as either capital gains/losses or ordinary income/losses, depending on the type of asset or transaction involved.

Question 17

Capital recoveries increase the adjusted basis of an asset.

Accepted Answer

Capital recoveries, also known as reimbursements or refunds, do not increase the adjusted basis of an asset. They are typically deducted from the original cost or basis of the asset to determine the adjusted basis.

Question 18

Jack exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV)of stock owned by Hayden.Hayden takes the land subject to the liability.Jack incurs $500 of selling expenses.What is the amount of Jack's realized gain on the exchange?

Accepted Answer

The answer of Jack exchanged land with an adjusted basis...

Question 19

Antonio owns land held for investment with a basis of $28,000.The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000.What is Antonio's realized gain?

Accepted Answer

Antonio's realized gain is calculated by subtracting the basis from the amount received from the eminent domain payment. Therefore, the realized gain is $48,000 - $28,000 = $20,000. Option B is the correct choice.

Question 20

All realized gains and losses are recognized for tax purposes.

Accepted Answer

The answer of All realized gains and losses are recognized...

Quiz 5: Property Transactions: Capital Gains and Losses