Question 1

Orange Company had machinery destroyed by a fire on December 23,2012.The machinery had been acquired on April 1,2010,for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed and Orange received $30,000 of insurance proceeds for the machine and did not replace it.This was Orange's only casualty or theft event for the year.As a result of this event,Orange has:
A) $4,200 ordinary loss.
B) $15,800 § 1245 recapture gain.
C) $14,200 § 1245 recapture gain.
D) $30,000 § 1231 gain.
E) None of the above.

Accepted Answer

The answer of Orange Company had machinery destroyed by a...

Question 2

Copper Corporation sold machinery for $27,000 on December 31,2012.The machinery had been purchased on January 2,2009,for $30,000 and had an adjusted basis of $21,000 at the date of the sale.For 2012,what should Copper Corporation report?
A) Ordinary income of $6,000.
B) A § 1231 gain of $3,000 and $3,000 of ordinary income.
C) A § 1231 gain of $6,000.
D) A § 1231 gain of $6,000 and $3,000 of ordinary income.
E) None of the above.

Accepted Answer

The answer of Copper Corporation sold machinery for $27,000 on...

Question 3

Section 1239 (relating to the sale of certain property between related taxpayers)does not apply unless the property:
A) Was depreciated by the transferor.
B) Is depreciable in the hands of the transferee.
C) Is a capital asset.
D) Is real property.
E) None of the above.

Accepted Answer

Section 1239 only applies to the sale of depreciable property between related taxpayers. Therefore, choice B is the correct answer. Choice A is incorrect because depreciation by the transferor is not a requirement for Section 1239 to apply. Choice C is incorrect because Section 1239 can apply to both capital and non-capital assets. Choice D is incorrect because Section 1239 can apply to both real and personal property. Choice E is incorrect because there is a specific requirement (depreciable property) for Section 1239 to apply.

Question 4

Red Company had an involuntary conversion on December 23,2012.The machinery had been acquired on April 1,2010,for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event,Red initially has:
A) $10,000 § 1231 loss.
B) $10,000 § 1245 recapture gain.
C) $4,200 casualty loss.
D) $4,200 § 1231 loss.
E) None of the above.

Accepted Answer

The insurance proceeds of $10,000 should be compared to the adjusted basis of $14,200. Since the insurance proceeds are less than the adjusted basis, a casualty loss of $4,200 ($14,200 - $10,000) is recognized. It is not a § 1231 loss, § 1245 recapture gain, or any other type of gain or loss.

Question 5

A business taxpayer sold all the depreciable assets of the business,calculated the gains and losses,and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $22,000.What is the treatment of the gains and losses summarized in the chart below after all possible netting and reclassification has been completed? What is the taxpayer's adjusted gross income? (Ignore the self-employment tax deduction.)

Accepted Answer

The answer of A business taxpayer sold all the depreciable...

Question 6

An individual has a $20,000 § 1245 gain,a $15,000 § 1231 gain,a $13,000 § 1231 loss,a $3,000 § 1231 lookback loss,and a $15,000 long-term capital gain.The net long-term capital gain is:
A) $30,000.
B) $40,000.
C) $17,000.
D) $15,000.
E) None of the above.

Accepted Answer

The answer of An individual has a $20,000 § 1245...

Question 7

Assume a building is subject to § 1250 depreciation recapture because it was acquired before 1987 and accelerated depreciation was used to depreciate it.The building is destroyed in a fire and this is the taxpayer's only casualty or theft for the year.In which of the following situations could there be a § 1250 depreciation recapture gain?
A) There is a loss because the insurance recovery is less than the adjusted basis.
B) There is a gain because the insurance recovery exceeds the adjusted basis.
C) Because of the length of time the building has been held, there is no remaining additional depreciation.
D) There is an insurance recovery, the adjusted basis of the building is zero, and straight-line depreciation was used.
E) None of the above.

Accepted Answer

If the insurance recovery exceeds the adjusted basis, there would be a gain and therefore depreciation recapture under § 1250. A loss (option A) or zero adjusted basis (option D) would result in no gain or recapture. Option C is irrelevant to the situation. Option E is incorrect as one of the options (B) does result in depreciation recapture.

Question 8

Which of the following real property could be subject to § 1250 depreciation recapture?
A) Leasehold improvements placed in service in 2012 on which § 168(k) additional first-year depreciation was taken.
B) A building acquired in 1997 on which straight-line depreciation was taken.
C) Equipment on which accelerated depreciation was taken.
D) Land which was not depreciated.
E) a. and b.

Accepted Answer

The answer of Which of the following real property could...

Question 9

Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain?
A) Depreciable equipment held more than one year and sold for more than its original cost.
B) Amortizable goodwill held more than one year and disposed of for less than its adjusted basis.
C) Land held more than one year and sold for more than was paid for it.
D) Inventory held more than one year and sold for more than was paid for it.
E) None of the above.

Accepted Answer

Depreciable equipment held for more than one year and sold for more than its original cost creates potential §1245 depreciation recapture and potential §1231 gain. §1245 depreciation recapture causes a portion of the gain to be taxed as ordinary income instead of capital gain. §1231 gain relates to the sale of business assets held for more than one year and can be taxed as capital gain.

Question 10

Which of the following would extinguish the § 1245 recapture potential?
A) An exchange of depreciable business equipment for like-kind business equipment with gain realized, but not recognized.
B) A nontaxable incorporation under § 351.
C) A nontaxable contribution to a partnership under § 721.
D) A nontaxable reorganization.
E) None of the above.

Accepted Answer

The answer of Which of the following would extinguish the...

Question 11

An individual has the following recognized gains and losses from disposition of § 1231 assets (all the assets were vacant land): $15,000 gain,$10,000 loss,$25,000 gain,and $2,000 loss.The individual has a $5,500 § 1231 lookback loss.The individual also has a $16,000 net short-term capital loss from the disposition of stock.Which of the following statements is correct?
A) The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain.
B) The taxpayer has $12,000 net long-term capital gain.
C) The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss.
D) The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain.
E) None of the above.

Accepted Answer

- We first offset the recognized losses against the recognized gains in chronological order:
    - $10,000 loss offsets part of first $15,000 gain ($5,000 gain remains)
    - $2,000 loss offsets part of second $25,000 gain ($23,000 gain remains)
    - Overall recognized gains: $5,000 + $23,000 = $28,000
- We then subtract the $5,500 § 1231 lookback loss from the overall recognized gains: $28,000 - $5,500 = $22,500
- The remaining amount is treated as long-term capital gain: $22,500 net long-term capital gain
- We combine this with the $0 net short-term capital gain (since the $16,000 net short-term capital loss can only offset up to $3,000 of ordinary income) to get a total of $22,500 net long-term capital gain
- The remaining $5,500 from the § 1231 lookback loss is treated as an ordinary gain. 
- Therefore, the taxpayer has $5,500 ordinary gain and $22,500 net long-term capital gain.

Question 12

A business taxpayer sold all the depreciable assets of the business,calculated the gains and losses,and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $12,000.What is the treatment of the gains and losses summarized in the chart below after all possible netting and reclassification has been completed? What is the taxpayer's adjusted gross income? (Ignore the self-employment tax deduction.)

Accepted Answer

The answer of A business taxpayer sold all the depreciable...

Question 13

Lynne owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line)of $65,000.If Lynne sold the property,she would have a $53,000 gain.The initial characterization of the gain would be:
A) Section 1245 gain.
B) Section 1231 gain.
C) Section 1250 gain.
D) Section 1239 gain.
E) None of the above.

Accepted Answer

Since the property is depreciable, the gain would first be characterized as Section 1245 gain (gain on the sale of depreciable personal property). However, since the property is residential rental real estate, the gain would then be subject to the rules of Section 1250, which generally treats depreciation as ordinary income but allows for some of the gain to be treated as long-term capital gain. Therefore, the initial characterization of the gain would be Section 1231 gain (gain on the sale of property used in a trade or business).

Question 14

Which of the following events could result in § 1250 depreciation recapture?
A) Sale at a loss of a depreciable business building held more than one year.
B) Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C) Sale at a gain of a depreciable business building held for 9 months.
D) Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E) None of the above.

Accepted Answer

The answer of Which of the following events could result...

Question 15

Business equipment is purchased on March 10,2011,used in the business until September 29,2011,and sold at a $23,000 loss on October 10,2011.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2011 Form 4797,Part:
A) I.
B) II.
C) III.
D) IV.
E) This transaction would not be reported in the Form 4797.

Accepted Answer

The loss on the disposition of business equipment should be reported on Form 4797, Part II, which is used for reporting the sale or exchange of property used in a trade or business. Since the equipment was used in the business for a significant period of time, it qualifies as property used in a trade or business and the loss on its sale should be reported on Part II of Form 4797.

Question 16

A retail building used in the business of a sole proprietor is sold on March 10,2012,for $342,000.The building was acquired in 2002 for $400,000 and straight-line depreciation of $104,000 had been taken on the building.What is the maximum unrecaptured § 1250 gain from the disposition of this building?
A) $400,000.
B) $322,000.
C) $104,000.
D) $26,000.
E) None of the above.

Accepted Answer

The answer of A retail building used in the business...

Question 17

Which of the following statements is correct?
A) When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.
B) When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.
C) When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.
D) When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E) All of the above are correct.

Accepted Answer

When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished. This means that the taxpayer who inherits the property will not have to pay depreciation recapture tax if they later sell the property. Option A is incorrect because depreciation recapture potential is not extinguished when depreciable property is gifted to another individual taxpayer. Option C is incorrect because when corporate depreciable property is distributed as a dividend, the depreciation recapture potential is recognized. Option D is incorrect because when depreciable property is contributed to charity, the depreciation recapture potential reduces the amount of the charitable contribution deduction that the taxpayer can claim.

Question 18

A business machine purchased April 10,2010,for $202,000 was fully depreciated in 2010 using § 179 immediate expensing.On August 15,2012,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?

Accepted Answer

The answer of A business machine purchased April 10,2010,for $202,000...

Question 19

Blue Company sold machinery for $45,000 on December 23,2012.The machinery had been acquired on April 1,2010,for $49,000 and its adjusted basis was $14,200.The § 1231 gain,§ 1245 recapture gain,and § 1231 loss from this transaction are:
A) $0 § 1231 gain, $30,800 § 1245 recapture gain, $0 § 1231 loss.
B) $0 § 1231 gain, $0 § 1245 recapture gain, $34,800 § 1231 loss.
C) $4,000 § 1231 gain, $34,800 § 1245 recapture gain, $0 § 1231 loss.
D) $0 § 1231 gain, $34,800 § 1245 recapture gain, $14,200 § 1231 loss.
E) None of the above.

Accepted Answer

The answer of Blue Company sold machinery for $45,000 on...

Question 20

Section 1231 gain that is treated as long-term capital gain carries from the 2011 Form 4797 to the 2011 Form 1040,Schedule D,line ____.
A) 8.
B) 9.
C) 10.
D) 11.
E) None of the above.

Accepted Answer

The answer of Section 1231 gain that is treated as...

Quiz 17: Property Transactions: Section 1231 and Recapture Provisions

Copper Corporation sold machinery for $27,000 on December 31,2012.The machinery had been purchased on January 2,2009,for $30,000 and had an adjusted basis of $21,000 at the date of the sale.For 2012,what should Copper Corporation report?

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:

An individual has a $20,000 § 1245 gain,a $15,000 § 1231 gain,a $13,000 § 1231 loss,a $3,000 § 1231 lookback loss,and a $15,000 long-term capital gain.The net long-term capital gain is:

Which of the following real property could be subject to § 1250 depreciation recapture?

Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain?

Which of the following would extinguish the § 1245 recapture potential?

Lynne owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line) of $65,000.If Lynne sold the property,she would have a $53,000 gain.The initial characterization of the gain would be:

Which of the following events could result in § 1250 depreciation recapture?

Business equipment is purchased on March 10,2011,used in the business until September 29,2011,and sold at a $23,000 loss on October 10,2011.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2011 Form 4797,Part:

Which of the following statements is correct?

A business machine purchased April 10,2010,for $202,000 was fully depreciated in 2010 using § 179 immediate expensing.On August 15,2012,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?

Blue Company sold machinery for $45,000 on December 23,2012.The machinery had been acquired on April 1,2010,for $49,000 and its adjusted basis was $14,200.The § 1231 gain,§ 1245 recapture gain,and § 1231 loss from this transaction are:

Section 1231 gain that is treated as long-term capital gain carries from the 2011 Form 4797 to the 2011 Form 1040,Schedule D,line ____.