Question 1

In 2014, Paul, a single taxpayer, has taxable income of $30,000 exclusive of capital gains and losses. Paul incurred a $1,000 short-term capital loss and a $5,000 long-term capital loss. What is the amount of his long-term capital loss carryover to 2015?

Accepted Answer

Paul's net short-term capital loss is $0 ($1,000 short-term capital loss - $1,000 short-term capital gain = $0). 
Paul's net long-term capital loss is $4,000 ($5,000 long-term capital loss - $1,000 long-term capital gain = $4,000). 
Paul can use up to $3,000 of his net long-term capital loss to offset his ordinary income in 2014. 
The remaining $1,000 of his net long-term capital loss can be carried over to 2015. Therefore, the answer is C.

Question 2

Which of the following assets is not a Section 1231 asset?

Accepted Answer

Inventory is not a Section 1231 asset. Section 1231 assets include assets used in a trade or business that are held for more than one year, such as equipment, unharvested crops, and timber. Inventory, which includes goods held for sale, is not considered a Section 1231 asset but is instead treated as ordinary income or loss when sold.

Question 3

Martha has a net capital loss of $17,000 and other ordinary taxable income of $45,000 for the current year. What is the amount of Martha's capital loss carryforward?

Accepted Answer

Martha can use $3,000 of her net capital loss to offset her other ordinary taxable income, leaving a remaining net capital loss of $14,000. This remaining loss can be carried forward to future years indefinitely, according to IRS regulations.

Question 4

In December, 2014, Ben and Jeri (married, filing jointly) have a long-term capital gain of $55,000 on the sale of stock held for 4 years. They have no other capital gains and losses for the year. After standard deduction and personal exemptions, their ordinary income for the year, before the capital gain, is $73,800, making their total income for the year $128,800, ($73,800 + $55,000). In 2014, married taxpayers pay tax of $10,163 at 10-percent and 15-percent rates (from the tax rate schedules) on the first $73,800 of ordinary taxable income and 25 percent on ordinary taxable income up to $148,850. What is their total tax liability?

Accepted Answer

The $55,000 capital gain is taxed at the 15% long-term capital gains rate. The ordinary income of $73,800 is taxed at $10,163. The capital gain tax is $55,000 * 15% = $8,250. Total tax liability is $10,163 + $8,250 = $18,413.

Question 5

In 2014, Marc, a single taxpayer, has ordinary income of $35,000. In addition, he has $3,000 in short-term capital gains, short-term capital losses of $6,000, and long-term capital gains of $4,000. What is Marc's adjusted gross income (AGI) for 2014?

Accepted Answer

To calculate Marc's AGI, we start with his ordinary income of $35,000 and add his long-term capital gains of $4,000, for a total of $39,000. Then we subtract Marc's short-term capital losses of $6,000 from his short-term capital gains of $3,000, which gives us a net short-term capital loss of $3,000. This net short-term capital loss is deductible up to $3,000 against ordinary income. Therefore, Marc's AGI is $39,000 - $3,000 = $36,000.

Question 6

Robert and Becca are in the 25-percent tax bracket. They have a long-term capital gain of $28,000 and a long-term capital loss of $17,000 on sales of stock in 2014. What will their capital gains tax be in 2014?

Accepted Answer

The net capital gain is $11,000 ($28,000 gain - $17,000 loss). The long-term capital gains tax rate for those in the 25% tax bracket is 15%. Therefore, the tax is $11,000 * 15% = $1,650.

Question 7

For the year 2014, Susan had salary income of $20,000. In addition she reported the following capital transactions during the year: There were no other items includable in her gross income. What is the amount of her adjusted gross income for 2014?

Accepted Answer

The answer of For the year 2014, Susan had salary...

Question 8

For purposes of taxation of capital gains:

Accepted Answer

A) Short-term capital gains are taxed at ordinary income tax rates, not 5 percent.
B) Gains on collectibles are taxed at a maximum rate of 28 percent, not ordinary income tax rates.
C) Gains on Section 1231 assets may be treated as long-term capital gains, while losses in some cases may be deducted as ordinary losses.
D) Under the provisions of Section 1245, any gain recognized on the disposition of a Section 1245 asset will be classified as ordinary income, not as a capital gain.

Question 9

Which of the following is true about capital gains?

Accepted Answer

For 2014, long-term capital gains are subject to a special tax treatment. The other options are incorrect - short-term capital gains are netted with other gains and losses, long-term capital gains are taxed, and net short-term capital gains are netted with net long-term capital losses.

Question 10

For purposes of determining the adjusted basis of a capital asset at the time of its sale,

Accepted Answer

Capital improvements, such as adding a new room to a house or installing a new heating system, increase the value of the asset and are added to the basis. Ordinary repairs, however, are considered maintenance expenses and do not affect the basis. Accumulated depreciation is subtracted from the basis, not added. Costs such as title insurance and escrow fees related to the initial purchase are included in the basis.

Question 11

Bennett purchased a tract of land for $20,000 in 2005 when he heard that a new highway was going to be constructed through the property and the land would soon be worth $200,000. The highway project was abandoned in 2014 and the value of the land fell to $15,000. Bennett can claim a loss in 2014 of:

Accepted Answer

Bennett cannot claim a loss because the loss is unrealized; he has not sold the land. The value decrease does not result in a deductible loss.

Question 12

The adjusted basis of an asset may be determined by the:

Accepted Answer

The answer of The adjusted basis of an asset may...

Question 13

For the 2014 tax year, Morgan had $25,000 of ordinary income. In addition, he had an $1,900 long-term capital loss and a $1,600 short-term capital loss. What will be the amount of Morgan's capital loss carryforward to 2015?

Accepted Answer

The answer of For the 2014 tax year, Morgan had...

Question 14

Carlos bought a building for $113,000 in 2010. He built an addition to the building for $26,000. In 2014, he sold it for $186,000. What was his long-term capital gain?

Accepted Answer

The long-term capital gain is the difference between the selling price and the cost basis. The cost basis is the original purchase price plus the cost of any improvements. In this case, the cost basis is $113,000 + $26,000 = $139,000. The selling price is $186,000. Therefore, the long-term capital gain is $186,000 - $139,000 = $47,000.

Question 15

Martha has a net capital loss of $20,000 and other ordinary taxable income of $48,000 for the current tax year. What is the amount of Martha's taxable income after deducting the allowed capital loss?

Accepted Answer

Martha can deduct up to $3,000 of her net capital loss from her other ordinary taxable income, leaving her with a taxable income of $45,000 ($48,000 - $3,000).

Question 16

An asset's adjusted basis is computed as:

Accepted Answer

The adjusted basis of an asset is equal to the original basis plus any capital improvements made to the asset, and then reduced by any accumulated depreciation taken on the asset. Therefore, option A is the correct choice as it reflects this calculation.

Question 17

Ben purchased an apartment building about 10 years ago, for $200,000. The building has been depreciated over the appropriate recovery period using the straight-line method. On December 31, 2014, the building was sold for $220,000, when the accumulated depreciation was $62,500. Ben is in the highest tax bracket; on his 2014 tax return, he should report:

Accepted Answer

The sale results in a Section 1231 gain of $20,000 (sale price $220,000 - adjusted basis $200,000 - $62,500 depreciation) and "unrecaptured depreciation" of $62,500 taxed at 25%.

Question 18

Sol purchased land as an investment on January 12, 2005, for $85,000. On January 31, 2014, Sol sold the land for $25,000 cash. In addition, the purchaser assumed the mortgage of $70,000 on the land. What is the amount realized (not gain realized) on the sale of the land?

Accepted Answer

The amount realized on the sale of the land is the sum of the cash received and the mortgage assumed, which is $25,000 + $70,000 = $95,000.

Question 19

Which one of the following is true about Section 1231 assets?

Accepted Answer

Section 1231 asset losses must be netted against 1231 asset gains before tax treatment is determined. The other statements are false: (A) Section 1231 assets are treated differently from capital assets, (B) business property held for one year or less is not considered a Section 1231 asset, (C) company stock is not considered a Section 1231 asset.

Question 20

On December 31, 2014, Henry, a sole proprietor, sold for $70,000 a machine that was used in his business. The machine had been purchased in a few years ago for $50,000, and when it was sold, it had accumulated depreciation of $15,000 and an adjusted basis of $35,000. For the year 2014, how should this gain be treated?

Accepted Answer

The gain on the sale is $35,000 ($70,000 - $35,000 adjusted basis). The $15,000 depreciation recapture is treated as ordinary income, and the remaining $20,000 is a Section 1231 gain.

Quiz 8: Capital Gains and Losses