Question 1

Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec. 1231 losses during the current year. The only other Sec. 1231 item was a $4,000 loss three years ago. This year, Daniel must report

Accepted Answer

The answer of Daniel recognizes $35,000 of Sec. 1231 gains...

Question 2

The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

Accepted Answer

This is because the amount recaptured as ordinary income is limited to the lesser of the depreciation allowed or taken on the property, or the realized gain on the sale of the property.

Question 3

When gain is recognized on an involuntary conversion, gain is subject to recapture under Sec. 1245 or Sec.1250.

Accepted Answer

When gain is recognized on an involuntary conversion, it is subject to recapture under Sec. 1245 or Sec.1250. This is because these sections aim to tax the gain that was previously deferred due to the conversion.

Question 4

Costs of tangible personal business property which are expensed under Sec. 179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

Accepted Answer

This is true according to IRS Publication 946, which states that if property expensed under Sec. 179 is converted to nonbusiness use before the end of the MACRS recovery period, the taxpayer must include the recapture amount as ordinary income in the tax year of the conversion.

Question 5

The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.

Accepted Answer

The answer of The additional recapture under Sec. 291 is...

Question 6

Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses. The gains and losses are characterized as

Accepted Answer

The answer of Jeremy has $18,000 of Section 1231 gains...

Question 7

Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Pierce's AGI?

Accepted Answer

Section 1231 gains and losses are treated as ordinary gains and losses, so Pierce's Section 1231 loss and gain offset each other to result in $0. Pierce's AGI would be his salary of $50,000 plus $0 from Section 1231 gains and losses, for a total AGI of $50,000. None of the other choices accurately reflect Pierce's situation. Choice A incorrectly assumes that Pierce has a net long-term capital gain, and choice C incorrectly assumes that Pierce has a long-term capital loss carryover. Choice D incorrectly assumes that Pierce has a net long-term capital gain and a high amount of net ordinary income.

Question 8

When appreciated property is transferred at death, the recapture potential carries over to the person who receives the property from the decedent.

Accepted Answer

The answer of When appreciated property is transferred at death,...

Question 9

If no gain is recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential carries over to the replacement property.

Accepted Answer

If there is no gain recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential (potential for depreciation recapture) carries over to the replacement property. This means that if the replacement property is later sold, any depreciation recapture that would have been recognized if the original property had been sold will be recognized at that time.

Question 10

When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

Accepted Answer

When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor according to the tax code.

Question 11

During the current year, Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss. Prior to this, Danika's only Section 1231 item was a $15,000 loss two years ago. Danika must report a(n)

Accepted Answer

The answer of During the current year, Danika recognizes a...

Question 12

During the current year, George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land. Prior to this, George's only Section 1231 item was a $14,000 loss six years ago. George must report a

Accepted Answer

The answer of During the current year, George recognizes a...

Question 13

Section 1250 does not apply to assets sold or exchanged at a loss.

Accepted Answer

Section 1250 of the Internal Revenue Code applies to the depreciation recapture on the sale of certain depreciable real property. However, if the asset is sold or exchanged at a loss, Section 1250 does not apply.

Question 14

During the current year, Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land. Prior to this, Kayla's only Section 1231 item was a $10,000 loss six years ago. Kayla is in the 28% marginal tax bracket. The amount of tax resulting from these transactions is

Accepted Answer

- First, we need to net the Section 1231 gain and loss: $40,000 - $22,000 = $18,000.
- Next, we need to see if this net amount results in a Section 1231 gain or loss, taking into account any prior year Section 1231 items. In this case, the only prior year Section 1231 item was a $10,000 loss, so the net Section 1231 amount is $18,000 - $10,000 = $8,000.
- Since this is a Section 1231 gain, we need to determine if it qualifies as long-term or short-term. Section 1231 gains and losses are considered long-term if the asset was held for more than one year. Since the sale of land generated both the gain and loss, we need to determine the holding period for each. If Kayla held the land that generated the gain for more than one year, the net amount of $8,000 would be a long-term Section 1231 gain. If Kayla held the land that generated the loss for more than one year, the net amount of $8,000 would be a long-term Section 1231 loss. However, we don't have that information, so we'll assume that the land that generated the gain was held for more than one year, making the $8,000 a long-term Section 1231 gain.
- Long-term Section 1231 gains and losses are taxed at a maximum rate of 25%. In this case, Kayla is in the 28% marginal tax bracket, so the $8,000 long-term Section 1231 gain would be taxed at 25%. The tax on this gain would be $2,000 ($8,000 x 0.25).
- However, since this is a net Section 1231 gain, we also need to consider if it will result in any additional tax under the unrecaptured Section 1250 rule. This rule applies to gains from the sale of certain real property and limits the amount of Section 1231 gain that can be taxed at 25%. In this case, we don't have enough information to determine if the unrecaptured Section 1250 rule applies, so we'll assume that it doesn't.
- Therefore, the total tax resulting from these transactions is $2,000. However, we also need to consider any reduction in tax resulting from the $22,000 Section 1231 loss. Section 1231 losses can be used to offset both ordinary income and capital gain income. Since the net Section 1231 gain was a long-term gain, it would be used to offset any long-term capital gains first, before being used to offset ordinary income. Kayla is in the 28% marginal tax bracket, so any long-term capital gains would be taxed at a maximum rate of 15%. Therefore, the $22,000 Section 1231 loss would offset $5,500 ($22,000 x 0.25) of the $8,000 Section 1231 gain. This would reduce the tax on the Section 1231 gain to $1,200 ($2,000 - $800). 
- Adding the tax on the Section 1231 gain and the reduction in tax from the Section 1231 loss gives us a total tax of $2,700 ($2,000 - $800 + $5000).

Question 15

Why did Congress establish favorable treatment for 1231 assets?

Accepted Answer

Congress established favorable treatment for 1231 assets to encourage the mobility of capital, allow a larger deduction for losses, and help business owners replace assets which had declined in value. The favorable treatment includes the ability to offset gains and losses from 1231 assets and treat gains as long-term capital gains for tax purposes.

Question 16

In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.

Accepted Answer

This is true. Section 291 of the Internal Revenue Code requires corporations to recapture a portion of the gain on the sale of certain depreciable real estate assets. This recapture is in addition to the regular recapture rules that apply to all taxpayers under Section 1250.

Question 17

Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.

Accepted Answer

While it is true that using straight-line depreciation under MACRS will not result in any depreciation recapture (ordinary income), it does not mean that the entire gain on the sale of the building will be capital gain. The gain must be allocated between the building itself (which is subject to depreciation recapture) and the land (which is not depreciable and therefore not subject to recapture). The portion attributable to the building will be ordinary income, while the portion attributable to the land will be capital gain.

Question 18

Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

Accepted Answer

The answer of Gain recognized on the sale or exchange...

Question 19

Installment sales of depreciable property which result in recaptured income under Secs. 1245 or 1250 require that the recaptured income be recognized in the year of sale.

Accepted Answer

Recaptured income under Secs. 1245 or 1250 from installment sales of depreciable property must be recognized in the year of sale.

Question 20

Gifts of appreciated depreciable property may trigger recapture of depreciation or cost-recovery deductions to the donor.

Accepted Answer

The answer of Gifts of appreciated depreciable property may trigger...

Quiz 13: Property Transactions: Section 1231 and Recapture