Question 1

Rosalee has the following capital gains and losses during the current year:
?
$\begin{array}{lc}
\text { Short-term capital loss } & \$(4,000) \
\text { Long-term capital gain } & 3,000 \
\text { Unrecaptured Section } 1250 \text { gain } & 6,000
\end{array}$

If Rosalee is in the 32% marginal tax rate bracket before considering her capital gains and losses, how much tax does she pay on her capital gains?

Accepted Answer

The short-term capital loss of $4,000 can be used to offset the long-term capital gain of $3,000, leaving Rosalee with a net long-term capital gain of $0 and an unrecaptured Section 1250 gain of $6,000. Unrecaptured Section 1250 gains are taxed at a maximum rate of 25%. Therefore, the tax on the $6,000 unrecaptured Section 1250 gain is $6,000 * 25% = $1,500. However, since Rosalee's marginal tax rate is 32% and not the question's focus, the calculation solely relies on the specific tax treatment of the unrecaptured Section 1250 gain. The correct calculation for the tax on the capital gains, considering the specific rates applicable to the unrecaptured Section 1250 gain, leads to the correct answer of $1,500, which is not among the provided options, indicating a misunderstanding in the initial response. The correct approach involves understanding the tax treatment of different types of gains and losses, and applying the appropriate tax rates to each.

Question 2

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

Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%, not 15%. It is a term that applies to individuals, not corporations, as corporations do not have a special tax rate for this type of gain.

Question 3

Philip purchased an apartment building in 2001 for $1,000,000. During 2018, 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 gain recognized would be calculated as follows:

Sales price = $800,000 
Adjusted basis = $1,000,000 - $300,000 = $700,000

Gain on Sale = $800,000 - $700,000 = $100,000

Since the building is a depreciable asset, the gain is classified as unrecaptured Section 1250 gain. This means that $100,000 of the gain will be taxed at a maximum rate of 25% as ordinary income.

Question 4

Wilshire Corporation purchased a commercial building in 2005 for $975,000. During 2018, 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 gain is calculated as the sale price ($775,000) minus the adjusted basis ($975,000 - $300,000 depreciation = $675,000), resulting in a $100,000 gain. Since the building is a depreciable real property, the gain is a Section 1231 gain.

Question 5

If an individual sells depreciable real estate at a gain
I.the entire gain is taxed at a maximum rate of 15%.
II.the gain due to depreciation is taxed as a long-term capital gain.
​

Accepted Answer

Both statements are incorrect. The gain on the sale of depreciable real estate is taxed as a long-term capital gain, but the tax rate varies depending on the individual's tax bracket. The gain due to depreciation is taxed as ordinary income, not as a long-term capital gain.

Question 6

Match each statement with the correct term below.
-Section 1250 recapture

Accepted Answer

The answer of Match each statement with the correct term...

Question 7

Hurst Company purchased an apartment building in 1986 for $700,000. The building is sold in 2018 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 an apartment building in...

Question 8

Dontrell sells a building used in his business at a gain of $20,000. The building was purchased in 2006, and $15,000 of depreciation had been deducted on the building to the date of sale. Dontrell's marginal tax rate is 32% without considering these two transactions. As a result of these transactions
I.Dontrell will pay additional tax of $4,500.
II.The building is Section 1245 property.
​

Accepted Answer

Statement I is correct as the gain of $20,000 will be subject to capital gains tax at the marginal rate of 32%, resulting in $6,400 in taxes. However, since $15,000 of depreciation had been previously deducted, this amount will be subject to recapture under Section 1250 of the Internal Revenue Code, resulting in an additional tax of $1,500 (equivalent to 25% of $15,000). Therefore, the total additional tax paid by Dontrell will be $4,900.

Statement II is irrelevant to the outcome of the tax calculation for this transaction, and whether the building is Section 1245 property or not does not affect the amount of tax payable.

Question 9

Match each statement with the correct term below.
-Section 1250 property

Accepted Answer

The answer of Match each statement with the correct term...

Question 10

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 11

Kate bought residential rental property for $500,000. She reported a total of $100,000 of straight-line depreciation. Kate sells the building in 2018 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 depreciation on the rental property, it must be considered a business or trade activity. Therefore, statement II is correct. The sale results in a $75,000 loss ($500,000 basis - $425,000 sale price), but since she claimed $100,000 in depreciation, she has to recapture some of the depreciation as ordinary income. The unrecaptured section 1250 gain is the amount of depreciation that exceeds the straight-line depreciation that would have been allowed, which is $100,000 - ($500,000/27.5 years x 3 years of ownership) = $25,000.

Question 12

Pedro sells a building for $170,000 in 2018. 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

Statement II is correct because for buildings purchased before 1987, only excess depreciation is recaptured under Section 1250. Statement III is correct because the unrecaptured Section 1250 gain is the difference between the sale price and the adjusted basis, and the remaining gain is a Section 1231 gain. Statement I is incorrect because MACRS straight-line depreciation does not result in recapture under Section 1250 for property placed in service after 1986.

Question 13

Match each statement with the correct term below.
-Section 1245 property

Accepted Answer

Depreciable tangible personal property is subject to full recapture as ordinary income of all depreciation taken.

Question 14

Match each statement with the correct term below.
-Section 1231 property

Accepted Answer

The answer of Match each statement with the correct term...

Question 15

Warren's 2018 adjusted gross income consists of the following items:
?
$$\begin{array} { l c } 
\text { Salary } & \$ 150,000 \
\text { Interest income } & 15,000 \
\text { Rental income } & 18,000 \
\text { Section } 1245 \text { gains } & 25,000 \
\text { Section } 1231 \text { gains } & 22,000 \
\text { Section } 1231 \text { losses } & ( 13,000 ) \
\text { LTCG } & 22,000 \
\text { LTCL } & ( 8,000 ) \
\text { STCG } & 2,000 \
\text { STCL Carryover } & ( 9,000 )
\end{array}$$
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 2013.
What net amounts of ordinary income, LTCG income and STCG income will Warren's 2018 adjusted gross income consist of? (i.e. what amounts are reported after completing the netting process?)
Ordinary
Income LTCG STCG

Accepted Answer

The answer of Warren's 2018 adjusted gross income consists of...

Question 16

Harry sells an apartment building for $117,000. The building was held as an investment, it cost $95,000 and had an basis of $83,000 at the date of the sale. If Harry is in the 32% marginal tax rate bracket without considering the effect of the sale, how much tax is paid on the gain on the sale of the apartment building?

Accepted Answer

The answer of Harry sells an apartment building for $117,000....

Question 17

Match each statement with the correct term below.
-Capital Asset

Accepted Answer

The answer of Match each statement with the correct term...

Question 18

Match each statement with the correct term below.
-Qualified Small Business stock gain

Accepted Answer

Qualified Small Business Stock (QSBS) gain refers to a tax benefit where all or part of the gain from the sale of certain small business stock is excluded from federal income tax under Section 1202 of the Internal Revenue Code.

Question 19

Match each statement with the correct term below.
-Collectible gain (loss)

Accepted Answer

Collectible gain (loss) refers to the gain or loss on the sale of items considered collectibles, such as artwork, which are taxed differently from regular income or investment gains.

Question 20

During 2003, Krump 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. Krump sells the building in 2018 for $500,000. What are the tax consequences of the sale? (Do not consider Krump's other transactions).

Accepted Answer

The answer of During 2003, Krump Corporation bought a factory...

Quiz 11: Property Dispositions

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 2001 for $1,000,000. During 2018, 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 2005 for $975,000. During 2018, 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?

If an individual sells depreciable real estate at a gain I.the entire gain is taxed at a maximum rate of 15%. II.the gain due to depreciation is taxed as a long-term capital gain. ​

Match each statement with the correct term below. -Section 1250 recapture

Match each statement with the correct term below. -Section 1250 property

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. ​

Match each statement with the correct term below. -Section 1245 property

Match each statement with the correct term below. -Section 1231 property

Match each statement with the correct term below. -Capital Asset

Match each statement with the correct term below. -Qualified Small Business stock gain

Match each statement with the correct term below. -Collectible gain (loss)

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

If an individual sells depreciable real estate at a gain I.the entire gain is taxed at a maximum rate of 15%. II.the gain due to depreciation is taxed as a long-term capital gain.

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.