Question 1

William purchased his personal residence in 2011 for $285,000.In early 2017, he lost his job and was unable to make payments on the mortgage.In December 2017, William worked out a new repayment schedule with his bank after he obtained a new job that reduced his mortgage from $235,000 to $120,000.Which of the following statements is true regarding this mortgage reduction?

Accepted Answer

The answer of William purchased his personal residence in 2011...

Question 2

Justin, who is single, sells his principal residence that he has owned and occupied for the past five years.His adjusted basis for the residence is $90,000.He incurred selling expenses of $10,000.How much gain must Justin recognize if sells the residence for $390,000?

Accepted Answer

The answer of Justin, who is single, sells his principal...

Question 3

Which of the following statements concerning the exclusion available under Section 121 for the sale of a personal residence is correct?

Accepted Answer

Section 121 of the Internal Revenue Code allows taxpayers to exclude up to $250,000 ($500,000 if married filing jointly) of gain from the sale of their primary residence, provided they have owned and used it as their main home for at least two out of the five years before the sale. This exclusion can be used every two years, making option C correct. Options A, B, and D describe provisions that are not accurate representations of the current law under Section 121.

Question 4

Bennett, who is single, owns all of the outstanding stock of Bennett Company.In 2019 Bennett sells all of his stock in the company for $30,000.If the stock qualifies as Section 1244 and his basis in the stock is $140,000, how is his loss on the sale classified for tax purposes?

Accepted Answer

The answer of Bennett, who is single, owns all of...

Question 5

Tina is single and one of the founding shareholders of Exacta Corporation.She acquired her Exacta Section 1244 stock four years ago for $123,000.During the current year, Tina sold all of her Exacta stock to an unrelated party for $40,000.Tina had no other capital gains or losses during the year.What is the maximum amount of loss Tina can deduct in the current year for the Exacta stock?

Accepted Answer

Section 1244 allows individuals to deduct up to $50,000 of loss on small business stock as an ordinary loss. The remaining $33,000 is treated as a capital loss, of which only $3,000 can be deducted in the current year. Therefore, the total deductible loss is $53,000 ($50,000 ordinary loss + $3,000 capital loss).

Question 6

An individual taxpayer has the following property transactions during the current year:

How do these transactions affect the individual's AGI?

Accepted Answer

The answer of An individual taxpayer has the following property...

Question 7

Liam used his auto 70 percent for business and 30 percent for personal use.He purchased it for $15,000 and has taken $5,460 of depreciation on it.What is his recognized gain on a sale for $12,000 and what is its character?

Accepted Answer

CThe recognized gain on the sale is calculated by subtracting the adjusted basis from the sale price. The adjusted basis is the original cost minus depreciation taken. Here, the adjusted basis is $15,000 - $5,460 = $9,540. The sale price is $12,000, so the recognized gain is $12,000 - $9,540 = $2,460. However, because the car was used for business, the depreciation recapture rules apply. The entire gain of $2,460 is treated as ordinary income under Section 1245 because it is less than the depreciation taken ($5,460). Therefore, the correct answers are B) $3,360 Section 1245 ordinary income, which is a mistake in calculation in the options provided, and C) $5,460 Section 1245 ordinary income, which correctly identifies the nature of the gain but does not match the calculated gain. The correct calculation should reflect the gain as ordinary income due to depreciation recapture rules, but the exact amount of recognized gain ($2,460) is not listed among the options. The character of the gain is correctly identified as Section 1245 ordinary income due to the depreciation recapture, but the provided options do not accurately reflect the calculated gain.

Question 8

Shawn, a single taxpayer, sold the house he lived in for seven years for $700,000.He purchased the house for $285,000.He made improvements at a cost of $125,000 and paid a $30,000 commission on the sale.What are Shawn's realized and recognized gains on the sale?

Accepted Answer

Shawn's realized gain is $260,000 ($700,000 - $285,000 - $125,000). His recognized gain is $10,000 ($260,000 - $30,000).

Question 9

Which of the following is not a requirement for the stock of a corporation to be considered Section 1244 stock?

Accepted Answer

Section 1244 of the Internal Revenue Code does not require the stock to be voting stock to qualify as Section 1244 stock. The key requirements include the corporation being a domestic small business corporation and the stock being issued for money or property, among other criteria.

Question 10

Sophia, a single taxpayer, is one of the founding shareholders of Davis Corporation.She acquired her Davis Corporation Section 1244 stock four years ago for $163,000.During the current year, Sophia sold all of her Davis stock to an unrelated party for $40,000.There were no other capital gains or losses reported on her tax return for the year.What is the maximum amount of loss that can be deducted on Sophia's current year tax return for the Davis stock?

Accepted Answer

The answer of Sophia, a single taxpayer, is one of...

Question 11

Clem and Chloe, a married couple, sell their principal residence that they have owned and occupied for the past twenty years.The adjusted basis for the residence is $324,000.They incurred selling expenses of $30,000.How much gain must they recognize if they sell the residence for $904,000?

Accepted Answer

The gain on the sale is calculated by subtracting the adjusted basis and selling expenses from the sale price: $904,000 - $324,000 - $30,000 = $550,000. However, under U.S. tax law, married couples filing jointly can exclude up to $500,000 of gain on the sale of their principal residence if they meet certain conditions, which they do in this case. Therefore, they must recognize $50,000 of gain ($550,000 - $500,000 exclusion).

Question 12

Melody works in her home using a computer she purchased two years ago for $2,500.The total adjusted basis for the computer is now $1,000.Her husband and children used the computer 20 percent of the time to play computer games and for personal correspondence.She sells the computer for $1,200.How much and what kind of gain does Melody recognize?

Accepted Answer

The computer is a depreciable asset used in a trade or business. The adjusted basis is $1,000, and it is sold for $1,200. The gain is $200. Since the computer was used 20% for personal use, 20% of the gain, or $40, is not subject to recapture. The remaining 80% of the gain, or $160, is subject to Section 1245 recapture.

Question 13

Donza Company has unrecaptured Section 1231 losses from the two previous years totaling $25,000 and a $32,000 Section 1231 gain in the current year.Based on this information, all of the following statements concerning Donza's taxable income for the current year are correct except:

Accepted Answer

Unrecaptured Section 1231 losses are not taxable as capital gains; instead, they are used to offset current year Section 1231 gains, recharacterizing them as ordinary income to the extent of the previous losses.

Question 14

Carol used her auto 60 percent for business and 40 percent for personal use.She purchased it for $10,800 and has taken $3,992 of depreciation on it.What is her recognized gain on a sale for $7,800 and what is it character?

Accepted Answer

The recognized gain is calculated as the sale price ($7,800) minus the adjusted basis ($10,800 purchase price - $3,992 depreciation = $6,808). The gain is $992. Since 60% of the car was used for business, the business portion of the gain is $992 * 60% = $595.20. However, the entire depreciation taken ($3,992) is subject to recapture under Section 1245, and since the gain is less than the depreciation, the entire gain is recaptured as ordinary income. Therefore, the Section 1245 recapture is $2,192.

Question 15

Margo purchased 2,000 shares of qualifying Section 1202 stock six years ago for $200,000.In the current year, she sold the stock for $2,000,000.How much gain can she exclude from her income?

Accepted Answer

The answer of Margo purchased 2,000 shares of qualifying Section...

Question 16

Kelly, a single individual, has $15,000 of taxable income before a long-term capital gain of $5,000 on the sale of some stock owned for two years that she sold in 2018.What is the tax rate applied to this gain?

Accepted Answer

For the tax year 2018, individuals with taxable income (including their long-term capital gains) that falls within the 10% or 12% ordinary income tax brackets are subject to a 0% tax rate on those gains. Kelly's total taxable income, including her long-term capital gain, would be $20,000, which would place her in the 12% ordinary income tax bracket for a single filer in 2018. Therefore, her long-term capital gain would be taxed at 0%.

Question 17

Abby has a $10,000 loss on some collectibles, a $5,000 Sec.1202 gain, and an $11,000 gain on some securities.If all gains and losses are long-term and Abby is in the 24 percent tax bracket, how is her net gain taxed?

Accepted Answer

The net gain is $6,000 ($5,000 Sec.1202 gain + $11,000 securities gain - $10,000 collectibles loss). Long-term capital gains are taxed at a maximum rate of 15% for taxpayers in the 24% tax bracket.

Question 18

Wally (who is in the 24 percent tax bracket) has a $5,000 short-term capital loss on some bonds, a $6,000 long-term capital loss on collectibles, a $15,000 Section 1202 gain, and a net $4,000 long-term capital gain from an investment.What is amount and type of gain(s) and tax rate(s) applied?

Accepted Answer

Wally's $5,000 short-term capital loss and $6,000 long-term capital loss can be combined for a total loss of $11,000. This total loss can offset the $15,000 Section 1202 gain (which is taxed at a 28% rate for collectibles) and the $4,000 long-term capital gain (which is taxed at a 15% rate for his tax bracket). After offsetting the gains with the losses, Wally is left with a $4,000 gain taxed at 28% (from the Section 1202 gain on collectibles) and a $4,000 long-term capital gain taxed at 15%.

Question 19

Becky bought a home with her husband, Ken, in 2004 for $125,000.They were divorced in 2013 and Becky became sole owner of the home under the divorce decree.On January 5, 2018, Becky married Michael.Michael and Becky have been living in the house since their marriage but they are planning now to move.If Michael and Becky sell their home on December 15, 2019 for $500,000, how much taxable gain must they report on their 2019 joint tax return?

Accepted Answer

The answer of Becky bought a home with her husband,...

Question 20

Ian and Mia married in early 2019 and purchased a new home together.Each owned and lived in separate residences prior to the marriage.Ian purchased his residence 5 years ago for $190,000 and he added a master bedroom and bathroom addition at a cost of $40,000.Mia purchased her home three years ago for $135,000.In late 2019, Ian sold his residence for $510,000 and paid a sales commission of $8,000.After paying off his $80,000 mortgage balance, he received the remaining cash proceeds of $422,000.In late 2019 Mia sold her residence for $190,000 and paid a sales commission of $2,000.She had paid off her mortgage so she received $188,000 cash from the sale.If Ian and Mia file a joint tax return for 2019, how much gain do they recognize on their 2019 joint tax return from the sales of their previous homes?

Accepted Answer

Ian's gain is $242,000 ($510,000 - $190,000 - $40,000 - $80,000). Mia's gain is $55,000 ($190,000 - $135,000). Their total gain is $297,000. However, they can exclude up to $250,000 of gain from the sale of their principal residence. Therefore, their recognized gain is $47,000 ($297,000 - $250,000).

Quiz 8: Property Dispositions