Question 1

Which one of the following is NOT considered boot in a like-kind exchange?

Accepted Answer

The answer of Which one of the following is NOT...

Question 2

Alpha sold machinery,which it used in its business,to Beta,a related entity,for $40,000.Beta used the machinery in its business.Alpha bought the machinery a few years ago for $50,000 and has claimed $30,000 of depreciation expense.What is the amount and character of Alpha's gain?

Accepted Answer

The sale of machinery between related entities is subject to the related party rules under §1239. Under these rules, any gain recognized by the seller is treated as ordinary income. In this case, Alpha sold the machinery to Beta for $40,000, resulting in a $10,000 loss ($40,000 sale price - $50,000 adjusted basis). However, because the sale is between related entities, the $10,000 loss is treated as ordinary income under §1239. Therefore, Alpha has recognized $20,000 of ordinary income ($10,000 loss treated as ordinary income - $30,000 of depreciation claimed).

Question 3

Each of the following is true except for:

Accepted Answer

The answer of Each of the following is true except...

Question 4

When does unrecaptured §1250 gains apply?

Accepted Answer

Unrecaptured §1250 gains apply only when non-corporate taxpayers sell depreciable real property at a gain. The unrecaptured §1250 gains are the portion of the gain on the sale of the property that would have been taxed at a maximum rate of 25% had it been fully recaptured under §1250, but instead is taxed at a maximum rate of 20%. The election (Choice A) is not relevant to the application of unrecaptured §1250 gains. While §1245 recapture (Choice C) may impact the overall tax calculation, it is not directly related to the application of unrecaptured §1250 gains. Real property purchased before 1986 (Choice D) is relevant to depreciation rules, but it is not a requirement for the application of unrecaptured §1250 gains. Therefore, the best choice is B.

Question 5

Which of the following is NOT an involuntary conversion?

Accepted Answer

A foreclosure is a voluntary action taken by the lender to repossess the property due to non-payment by the borrower. Therefore, it is not an involuntary conversion.

Question 6

Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery.Arlington originally purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at the time of the exchange.The new machinery had a fair market value of $35,000.Arlington also received $2,000 of office equipment in the transaction.What is Arlington's gain or loss recognized on the exchange?

Accepted Answer

The answer of Arlington LLC traded machinery used in its...

Question 7

Koch traded machine 1 for machine 2.Koch originally purchased machine 1 for $75,000 and machine 1's adjusted basis was $40,000 at the time of the exchange.Machine 2's seller purchased it for $65,000 and machine 2's adjusted basis was $55,000 at the time of the exchange.What is Koch's adjusted basis in machine 2 after the exchange?

Accepted Answer

The answer of Koch traded machine 1 for machine 2.Koch...

Question 8

Winchester LLC sold the following business assets during the current year: (1)automobile,$30,000 cost basis,$12,000 depreciation,proceeds $20,000; (2)machinery,$25,000 cost basis,$20,000 depreciation,proceeds $10,000; (3)furniture,$15,000 cost basis,$10,000 depreciation,proceeds $4,000; (4)computer equipment,$25,000 cost basis,$6,000 depreciation,proceeds $10,000; (5)Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years.What is the amount and character of Winchester's gains and losses before the 1231 netting process? Assume all assets were held for more than one year.

Accepted Answer

All of the assets are §1231 assets: automobile $2,000 gain, machinery $5,000 gain, furniture $1,000 loss, and equipment $9,000 loss. The gains on the automobile and machinery are characterized as ordinary income to the extent the gains were created by depreciation deductions. This results in $7,000 ordinary gain and $10,000 §1231 loss. The §1231 look-back rule only applies when there is a net 1231 gain.

Question 9

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?

Accepted Answer

The primary purpose of a third-party intermediary in a deferred like-kind exchange is to prevent the seller from receiving cash (boot) that will taint the transaction. The intermediary holds the proceeds from the sale of the relinquished property and uses them to acquire the replacement property, ensuring that the transaction meets the requirements of a tax-deferred exchange. While the intermediary may also assist in finding and acquiring replacement property, their primary role is to prevent the taxable receipt of cash or other property that could disqualify the exchange. Therefore, option C is the correct answer.

Question 10

Which one of the following is NOT true regarding a like-kind exchange?

Accepted Answer

The answer of Which one of the following is NOT...

Question 11

Which of the following is NOT true regarding §1239?

Accepted Answer

Section 1239 applies to gains on sales of both depreciable property and non-residential real property held for more than one year, not just non-residential real property. Therefore, statement C is not true.

Question 12

How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange?

Accepted Answer

According to the rules of a like-kind exchange, the taxpayer must identify the replacement property within 45 days after the initial exchange. Therefore, choice A is the best choice. Choices B, C, D, and E are incorrect because they provide alternative timelines that do not match the actual rule.

Question 13

Ashburn reported a $105,000 net §1231 gain in year 6.Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during years 1-5,what amount of Ashburn's net §1231 gain for year 6,if any,is treated as ordinary income?

Accepted Answer

The §1231 look-back rule recharacterizes $60,000 of the §1231 gain to ordinary income, the amount of the prior 5 year losses that received ordinary loss treatment.

Question 14

Which one of the following is NOT a requirement of a deferred like-kind exchange?

Accepted Answer

The requirement that the exchange must be completed within the taxable year is not correct. In fact, a deferred like-kind exchange can take up to 180 days to complete. The other requirements listed are correct: (A) the like-kind property to be received must be identified within 45 days, (C) the like-kind property must be received within 180 days, and (D) the exchanged property must be like-kind. Therefore, the answer is B.

Question 15

The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:

Accepted Answer

The basis of the new property received in a like-kind exchange is equal to the adjusted basis of the old property. This means that the basis of the new property is the same as it was for the old property before it was exchanged.

Question 16

Which of the following is true regarding the §1231 look-back rule?

Accepted Answer

The §1231 look-back rule applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years. The look-back rule recharacterizes any current §1231 gain as ordinary income to the extent of the nonrecaptured §1231 losses from the prior five years. Therefore, option A, B, D and E are incorrect.

Question 17

Why does §1250 recapture generally no longer apply?

Accepted Answer

The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method, which means that there is no longer a large difference between the adjusted basis and the sale price of the property when it is sold, so the recapture rules of §1250 are no longer necessary.

Question 18

Brandon,an individual,began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years.Brandon owned each of the assets for several years.In the current year,Brandon sold the following business assets:  Assuming Brandon's marginal ordinary income tax rate is 35 percent,what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

- The sales of assets A, B, and F are §1231 gains, while the sale of asset C is a §1245 gain. The total §1231 gains are $25,000, and the total §1245 gain is $2,000, which results in a net §1231 gain of $23,000.
- Since Brandon has sold §1231 assets with losses in the past five years, the net §1231 gain of $23,000 is subject to recapture as ordinary income. 
- Brandon also has a $10,000 long-term capital loss carryover that can be used to offset the §1231 gain. Therefore, the taxable amount of the §1231 gain is reduced to $13,000 ($23,000 - $10,000).
- Brandon also has $12,000 of ordinary income from the sale of asset D, resulting in a total taxable income of $25,000 ($13,000 + $12,000).
- Brandon's marginal ordinary income tax rate is 35%, so his tax liability is $6,150 ($13,000 x 0.35).

Therefore, the correct answer is C.

Question 19

Mary traded furniture used in her business to a furniture dealer for some new furniture.Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange.The new furniture had a fair market value of $40,000.Mary also gave $4,000 to the dealer in the transaction.What is Mary's adjusted basis in the new furniture after the exchange?

Accepted Answer

Mary's adjusted basis in the old furniture was $20,000, but she received new furniture with a fair market value of $40,000. Therefore, the difference of $20,000 is considered a gain. However, Mary also gave $4,000 in the transaction, which is subtracted from the gain. Thus, Mary's adjusted basis in the new furniture after the exchange is $24,000 ($20,000 + $20,000 gain - $4,000 paid).

Question 20

Brandon,an individual,began business four years ago and has never sold a §1231 asset.Brandon owned each of the assets for several years.In the current year,Brandon sold the following business assets:  Assuming Brandon's marginal ordinary income tax rate is 35 percent,what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

According to the information given, Brandon has never sold a §1231 asset before. Therefore, all of the assets sold in the current year will be treated as ordinary income.

The total amount of gains from the sales is $7,000 ($1,000 + $2,000 + $4,000). However, since the losses from the sales do not exceed the gains, none of the gains will be reclassified as §1231 gains.

Therefore, the entire $7,000 gain will be treated as ordinary income and taxed at Brandon's marginal ordinary income tax rate of 35%. This results in a tax liability of $2,450 ($7,000 x 0.35).

However, the question asks for the effect of both gains and losses on Brandon's tax liability. Since none of the losses exceed the gains, only the gains will be taxed. Therefore, only the $6,000 of ordinary income will increase Brandon's tax liability, resulting in a tax liability of $2,100 ($6,000 x 0.35).

Thus, choice B is the correct answer.

Quiz 3: Property Dispositions