Question 1

Unrecaptured Section 1250 gain
I.applies to real property owned by individuals and corporations.
II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.

Accepted Answer

Unrecaptured Section 1250 gain applies only to real property owned by individuals, not corporations. Statement II is correct in that it refers to the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.

Question 2

Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?

Accepted Answer

The answer of Elizabeth paid $400,000 for a warehouse.Using 39-year...

Question 3

Pedro sells a building for $170,000 in 2013.He paid $145,000 for the building and it had an adjusted basis of $110,000 as of the sale date.
I.If the building was purchased in 1993 and MACRS straight-line depreciation is used,$35,000 of the gain is recaptured under section 1250.
II.If the building is an apartment building purchased in 1985,only the gain which is attributable to excess depreciation is recaptured as ordinary income under Section 1250.
III.If the building was purchased in 1993,$35,000 of the gain is unrecaptured section 1250 gain,and $25,000 of the gain is a section 1231 gain.

Accepted Answer

The answer of Pedro sells a building for $170,000 in...

Question 4

Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity?

Accepted Answer

Section 1231 losses from the sale of depreciable business property are treated as ordinary losses, which means they can be fully deducted against ordinary income. This treatment allows taxpayers to benefit from a full deduction at their ordinary income tax rates, rather than being limited to the capital loss treatment, which might be less advantageous.

Question 5

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.Allowable depreciation of $8,000 had been deducted as of the sale date.What is the amount and character of the gain or (loss)on the sale of the equipment?

Accepted Answer

The answer of Olive Company sells factory equipment with an...

Question 6

George purchased a commercial building in 1984 for $900,000.During 2013,the building is sold for $700,000.The actual accelerated depreciation on the building as of the sale date was $400,000.Straight-line depreciation for the same period would have been $350,000.What is the amount and character of the gain recognized on the sale?

Accepted Answer

First, we need to calculate the adjusted basis (AB) of the building as of the sale date:
AB = Purchase Price - Accumulated Depreciation
AB = $900,000 - $400,000 = $500,000

Next, we need to calculate the gain on the sale:
Gain = Sale Price - AB
Gain = $700,000 - $500,000 = $200,000

The gain is the difference between the sale price and the adjusted basis. Since the building was held for over a year and is classified as Section 1250 property, we need to break down the gain into two categories: Section 1250 ordinary income and unrecaptured Section 1250 gain.

Section 1250 ordinary income is the amount of depreciation taken on the building that is taxed at ordinary income tax rates (currently up to 37%). We calculate the Section 1250 ordinary income by taking the lesser of the actual depreciation taken or the depreciation that would have been taken if straight-line depreciation were used.

Section 1250 ordinary income = lesser of actual depreciation taken or straight-line depreciation
Section 1250 ordinary income = lesser of $400,000 or $350,000
Section 1250 ordinary income = $350,000

The remaining gain is considered unrecaptured Section 1250 gain, which is taxed at a maximum rate of 25%.

Unrecaptured Section 1250 gain = Gain - Section 1250 ordinary income
Unrecaptured Section 1250 gain = $200,000 - $350,000
Unrecaptured Section 1250 gain = ($150,000)

Therefore, the answer is C: $50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250 gain.

Question 7

Kate bought residential rental property for $500,000.She reported a total of $100,000 of straight-line depreciation.Kate sells the building in 2013 for $425,000.What are the immediate tax consequences of the sale?
(Do not consider Kate's other transactions).
I.If Kate's rental activity is a production-of-income (investment)activity,she will report a $25,000 long-term capital gain.
II.If Kate's rental activity is a trade or business,she will report $25,000 of Unrecaptured Section 1250 gain.

Accepted Answer

Since Kate reported straight-line depreciation, the amount of depreciation recapture is $100,000. The difference between the sale price and the adjusted basis ($500,000 - $100,000 = $400,000) is the amount of the Section 1231 gain. However, since this property is residential rental property, the unrecaptured Section 1250 gain is $25,000. Therefore, statement II is correct and statement I is incorrect.

Question 8

Which of the following trade or business assets are Section 1245 properties?
I.Racehorses.
II.Livestock held for breeding purposes
III.Manufacturing equipment.
IV.Residential rental property placed in service in 2008.

Accepted Answer

Section 1245 property includes any depreciable property that is or has been subject to an allowance for depreciation and is either personal property, other tangible property (except buildings and their structural components) used as an integral part of manufacturing, production, or extraction or as a research facility, or certain other tangible property used in a business. This includes manufacturing equipment (III), racehorses (I), and livestock held for breeding purposes (II). Residential rental property (IV) does not qualify as Section 1245 property because it is generally considered Section 1250 property.

Question 9

Marybelle paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Marybelle deducts $24,868 for the first two years of usage.At the beginning of the third year,Marybelle sells the warehouse for $380,000.What is the character of the gain.

Accepted Answer

Since the depreciation method is straight-line, the entire $400,000 cost basis is subject to depreciation. After two years, the accumulated depreciation would be $24,868 x 2 = $49,736. Thus, the adjusted basis of the warehouse would be $400,000 - $49,736 = $350,264 at the beginning of the third year. 
Since Marybelle sold the warehouse for $380,000, she realized a gain of $29,736 ($380,000 - $350,264). This gain is considered an unrecaptured section 1250 gain because it relates to depreciation deductions that were subject to a maximum 25% rate (section 1250) rather than the usual 20% rate for long-term capital gains. Therefore, the correct answer is (D) Unrecaptured section 1250 gain.

Question 10

Unrecaptured Section 1250 gain
I.is subject to a maximum tax rate of 25%.
II.applies only to real property owned by individuals.

Accepted Answer

The answer of Unrecaptured Section 1250 gain
I.is subject to a...

Question 11

Warren's 2013 adjusted gross income consists of the following items:
$$\begin{array} { l c } 
\text { Salary } & \$ 150,000 \
\text { Interest income } & 15,000 \
\text { Rental income } & 18,000 \
\text { Section } 1245 \text { gains } & 25,000 \
\text { Section } 1231 \text { gains } & 22,000 \
\text { Section 1231 losses } & ( 13,000 ) \
\text { LTCG } & 22,000 \
\text { LTCL } & ( 8,000 ) \
\text { STCG } & 2,000 \
\text { STCL Carryover } & ( 9,000 )
\end{array}$$
Warren's combined §1231 gains and losses recognized over the prior five tax years included a net loss of $10,000.The STCL carryover arose from a loss reported in 1995.
What net amounts of ordinary income,LTCG income and STCG income will Warren's 2013 adjusted gross income consist of?
(i.e.what amounts are reported after completing the netting process?
)
$\begin{array}{llll}
& \text {Ordinary }\
& \text { Income}&\underline{\text { LTCG }}&\underline{\text {  STCG}}\
\text { a. } & \$ 208,000 & \$ 16,000 & \$-0- \
\text { b. } & \$ 217,000 & \$ 14,000 & \$(7,000) \
\text { c. } & \$ 208,000 & \$ 23,000 & \$(7,000) \
\text { d. } & \$ 217,000 & \$ 7,000 & \$-0-
\end{array}$

Accepted Answer

The answer of Warren's 2013 adjusted gross income consists of...

Question 12

Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2006 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Accepted Answer

The answer of Dallas Wildcat Drilling Co.sells an oil-drilling rig...

Question 13

Mountainview Corporation sells depreciable residential real estate for $525,000.The property cost $675,000,and $200,000 of accelerated depreciation was deducted on the property.Allowable straight-line depreciation for the same period would have been $180,000.Which of the following correctly states the character of the gain from the sale of the property?

Accepted Answer

- The property was sold for $525,000, which is $150,000 less than its original cost of $675,000.
- $200,000 of accelerated depreciation was deducted, which exceeds the straight-line depreciation expense of $180,000. This means that $20,000 of depreciation will be recaptured as ordinary income under Section 1250.
- The remaining $130,000 ($150,000 loss on sale minus $20,000 recaptured depreciation) will be a Section 1231 gain.
- Therefore, the correct answer is C: $30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.

Question 14

Hurst Company purchased a commercial building in 1984 for $700,000.The building is sold in 2013 for $900,000.The actual depreciation deducted on the building as of the sale date was $600,000.Straight-line depreciation for the same period would have been $400,000.What is the amount and character of the gain recognized on the sale?

Accepted Answer

The answer of Hurst Company purchased a commercial building in...

Question 15

Benson Company purchased a drill press on November 13,2010,at a cost of $30,000.Benson sells the drill press on January 3,2013,for $16,000.Regular MACRS depreciation on the drill press would be $18,500,while straight-line MACRS depreciation would total $12,000.
I.If Benson used regular MACRS depreciation,it would have a Section 1231 gain of $4,500.
II.If Benson used straight-line depreciation,it would have a Section 1231 loss of $2,000.
III.If Benson used regular MACRS depreciation,it would have Section 1245 ordinary income of $4,500.
IV.If Benson used straight-line depreciation,it would have an ordinary loss of $4,500.

Accepted Answer

The answer of Benson Company purchased a drill press on...

Question 16

Unrecaptured Section 1250 gain
I.is taxed at a maximum rate of 15%.
II.is a term that does not apply to corporations.

Accepted Answer

The answer of Unrecaptured Section 1250 gain
I.is taxed at a...

Question 17

Karl paid $200,000 for business-use equipment.Using straight-line depreciation,his deduction would have been $22,000,but Karl uses MACRS depreciation and deducts $37,500 for the first two years of usage.At the beginning of the third year,Karl sells the equipment for $190,000.How much of the gain is recaptured under Section 1245 as ordinary income?

Accepted Answer

Under MACRS depreciation, the equipment is classified as 5-year property. The depreciation deductions taken in the first two years amount to $37,500, which leaves an adjusted basis of $162,500 ($200,000 - $37,500).

The amount of gain that is recaptured as ordinary income under Section 1245 is equal to the lesser of:

1) the depreciation previously taken (in this case, $37,500) or 
2) the amount of gain realized on the sale (in this case, $190,000 - $162,500 = $27,500).

Therefore, the answer is D) $27,500.

Question 18

Philip purchased an apartment building in 1987 for $1,000,000.During 2013,the building is sold for $800,000.The accumulated depreciation on the building as of the sale date was $300,000.What is the amount and character of the gain recognized on the sale?

Accepted Answer

The amount of gain recognized on the sale is calculated as follows:
Sale price ($800,000) - Book value ($1,000,000 - $300,000) = $500,000. This gain is considered unrecaptured Section 1250 gain, which is a type of Section 1231 gain. Therefore, choice C is the correct answer.

Question 19

During 1993,Trump Corporation bought a factory building for $500,000.It deducted $180,000 of cost recovery deductions using straight-line depreciation while the building was in service.Trump sells the building in 2013 for $500,000.What are the tax consequences of the sale?
(Do not consider Trump's other transactions).

Accepted Answer

The answer of During 1993,Trump Corporation bought a factory building...

Question 20

Wilshire Corporation purchased a commercial building in 1987 for $975,000.During 2013,the building is sold for $775,000.The actual depreciation on the building as of the sale date was $300,000.What is the amount and character of the gain recognized on the sale?

Accepted Answer

The answer of Wilshire Corporation purchased a commercial building in...

Quiz 11: Property Dispositions

Unrecaptured Section 1250 gain I.applies to real property owned by individuals and corporations. II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.

Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?

Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity?

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.Allowable depreciation of $8,000 had been deducted as of the sale date.What is the amount and character of the gain or (loss) on the sale of the equipment?

Which of the following trade or business assets are Section 1245 properties? I.Racehorses. II.Livestock held for breeding purposes III.Manufacturing equipment. IV.Residential rental property placed in service in 2008.

Marybelle paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Marybelle deducts $24,868 for the first two years of usage.At the beginning of the third year,Marybelle sells the warehouse for $380,000.What is the character of the gain.

Unrecaptured Section 1250 gain I.is subject to a maximum tax rate of 25%. II.applies only to real property owned by individuals.

Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2006 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Unrecaptured Section 1250 gain I.is taxed at a maximum rate of 15%. II.is a term that does not apply to corporations.

Philip purchased an apartment building in 1987 for $1,000,000.During 2013,the building is sold for $800,000.The accumulated depreciation on the building as of the sale date was $300,000.What is the amount and character of the gain recognized on the sale?

Wilshire Corporation purchased a commercial building in 1987 for $975,000.During 2013,the building is sold for $775,000.The actual depreciation on the building as of the sale date was $300,000.What is the amount and character of the gain recognized on the sale?