Question 1

A worthless security had a holding period of 6 months when it became worthless on December 10,2015.The investor who had owned the security had a basis of $20,000 for it.Which of the following statements is correct?

Accepted Answer

The answer of A worthless security had a holding period...

Question 2

Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.

Accepted Answer

Section 1250 depreciation recapture applies when there is a gain on the sale of property that has been depreciated using accelerated depreciation methods. This recapture applies to property used both inside and outside the United States.

Question 3

The maximum amount of the unrecaptured § 1250 gain (25% gain)is the depreciation taken on real property sold at a recognized gain.

Accepted Answer

The maximum amount of the unrecaptured § 1250 gain is indeed the depreciation taken on real property sold at a recognized gain. This is because the term "unrecaptured" refers to the portion of the gain that has not yet been taxed as ordinary income due to prior depreciation deductions. The maximum amount is calculated as the difference between the total gain on the sale of the property and the "recaptured" portion of the gain, which is taxed as ordinary income. The unrecaptured gain is then taxed at a maximum rate of 25%.

Question 4

A business taxpayer sells inventory for $80,000.The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year.The taxpayer has:

Accepted Answer

Since the inventory was held for more than one year, it qualifies for long-term capital gains treatment. However, since the taxpayer is a business taxpayer and the inventory is considered to be held in the ordinary course of business, the gain is classified as ordinary income rather than a capital gain. Therefore, the taxpayer has an ordinary gain.

Question 5

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

Accepted Answer

When an option is exercised, the cost of the option is added to the basis of the property to which the option pertains. This is because the cost of the option represents an additional expense incurred by the purchaser in acquiring the property.

Question 6

Section 1245 depreciation recapture potential does not carryover from the deceased taxpayer to the beneficiary taxpayer.

Accepted Answer

Section 1245 depreciation recapture potential is not transferable to the beneficiary when the taxpayer dies. Thus, it does not carry over from the deceased taxpayer to the beneficiary taxpayer.

Question 7

On June 1,2015,Brady purchased an option to buy 1,000 shares of General,Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year,so Brady decided to let the option lapse as of December 1,2015.On his 2015 tax return,what should Brady report?

Accepted Answer

Brady purchased the option to buy 1,000 shares of General, Inc. at $40 per share for a total cost of $3,000. Since he let the option lapse and did not exercise it, he incurred a loss of $3,000. This loss is considered a short-term capital loss because he held the option for less than one year. Therefore, the correct answer is choice B, a $3,000 short-term capital loss.

Question 8

Section 1245 may apply to amortizable § 197 intangible assets.

Accepted Answer

Section 1245 applies to certain types of depreciable assets, including tangible personal property and certain intangible assets, such as patents or copyrights. As amortizable § 197 intangibles are considered to be depreciable assets for tax purposes, they may also be subject to Section 1245 recapture upon sale or disposition.

Question 9

Recognized gains and losses from disposition of a capital asset may occur as a result of a:

Accepted Answer

All of the choices listed (sale, exchange, casualty, and condemnation) can result in recognized gains or losses from the disposition of a capital asset. A sale occurs when the asset is sold for cash or other property. An exchange occurs when the asset is traded for another asset instead of selling it for cash. A casualty occurs when the asset is lost or damaged due to a sudden, unexpected, and unusual event such as a fire or natural disaster. A condemnation occurs when the government takes the asset for public use and compensates the owner for its fair market value. In each of these situations, the difference between the adjusted basis of the asset and the amount realized (i.e. the cash received or the fair market value of the property received) will result in a recognized gain or loss.

Question 10

Stanley operates a restaurant as a sole proprietorship.Which of the following items are capital assets in the hands of Stanley?

Accepted Answer

The answer of Stanley operates a restaurant as a sole...

Question 11

Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.

Accepted Answer

The answer of Section 1231 lookback losses may convert some...

Question 12

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

Accepted Answer

The answer of The § 1245 depreciation recapture potential does...

Question 13

For § 1245 recapture to apply,accelerated depreciation must have been taken on the property.

Accepted Answer

The answer of For § 1245 recapture to apply,accelerated depreciation...

Question 14

Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.

Accepted Answer

When a property is sold to a related party purchaser and is depreciable by the purchaser, the seller may have ordinary gain instead of capital gain. This is because the related party purchaser is not considered a disinterested party, and therefore the sale is subject to special tax rules under the IRS code. Under these rules, any gain from the sale of depreciable property may be treated as ordinary income instead of capital gain.

Question 15

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Accepted Answer

The maximum § 1245 depreciation recapture is generally equal to the accumulated depreciation taken on the property. This recapture occurs when a taxpayer sells or disposes of property that has been depreciated under § 1245 of the Internal Revenue Code.

Question 16

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.

Accepted Answer

Depreciation recapture under § 1245 and § 1250 is reported on Form 4797, as it is the form that is used to report the sale of business assets.

Question 17

Stella purchased vacant land in 2008 that she subdivided for resale as lots.All 10 of the lots were sold during 2015.The lots had a tax basis of $12,000 each and sold for $35,000 each.Stella made no substantial improvements to the lots.She acted as her own real estate broker;so there were no sales expenses for selling the lots.Which of the following statements is correct?

Accepted Answer

The answer of Stella purchased vacant land in 2008 that...

Question 18

Hiram is a computer engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hiram has a zero tax basis for the patent.In consideration of $800,000 plus a $1 royalty per device sold,Hiram assigns the patent to a computer manufacturing company.Hiram assigned all substantial rights in the patent.Which of the following is correct?

Accepted Answer

Hiram assigned all substantial rights in the patent, which means he transferred ownership of the patent. As a result, he will have a long-term capital gain from both the lump sum payment and the royalty payments. Since he held the patent for more than one year before the transfer, the gain is considered long-term.

Question 19

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago.Lana amortized $200 of the original issue discount and then sold the bond for $1,800.Which of the following statements is correct?

Accepted Answer

Lana purchased the bond for $1,410 and sold it for $1,800, resulting in a gain of $390. However, she also amortized $200 of original issue discount, which is treated as interest income and reduces the gain to $190. Since Lana held the bond for more than one year, the $190 gain is considered a long-term capital gain.

Question 20

The possible holding periods for capital assets include:

Accepted Answer

The holding periods for capital assets are classified as either short-term or long-term. Short-term capital assets are those held for 12 months or less, while long-term capital assets are held for more than 12 months. Therefore, the correct choice is C – Long-term = greater than 12 months.

Quiz 8: Property Transactions: Capital Gains and Losses, section 1231, and Recapture Provisions