Deck 3: Property Dispositions

Question 1

All tax gains and losses are ultimately characterized as either ordinary or capital.

Answer 1

True

Question 2

The adjusted basis is the initial basis less cost recovery deductions.

Answer 2

True

Question 3

The gain or loss realized on the sale of an asset is the amount realized less the adjusted basis.

Answer 3

True

Question 4

A parcel of land is always a capital asset.

Question 5

Accounts receivable and inventory are examples of ordinary assets.

Question 6

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent.

Question 7

Unrecaptured §1250 gains apply only to individuals.

Question 8

The gain or loss realized on the sale of an asset is always recognized for tax purposes.

Question 9

Ordinary gains and losses are obtained on the sale of investments.

Question 10

Assets held for investment and personal use assets are examples of capital assets.

Question 11

Depreciation recapture changes both the amount and character of a gain.

Question 12

§1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in service before 1987 as ordinary income.

Question 13

An asset's tax-adjusted basis is usually greater than its book-adjusted basis.

Question 14

Generally, the amount realized is everything of value received in a sale less selling expenses.

Question 15

Taxpayers can recognize a taxable gain on the sale of an asset even though an asset's real economic value has declined.

Question 16

For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

Question 17

The amount realized is the sale proceeds less the adjusted basis.

Question 18

§1231 assets include all assets used in a trade or business.

Question 19

Only accelerated depreciation is recaptured for §1245 assets.

Question 20

After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary.

Question 21

For a like-kind exchange, realized gain is deferred if the exchange is solely for like-kind property.

Question 22

A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital gain.

Question 23

The §1231 look-back rule applies whether there is a net gain or loss.

Question 24

Which of the following is not true regarding an asset's adjusted basis?

A) Tax-adjusted basis is usually greater than book-adjusted basis.
B) Tax-adjusted basis is usually less than book-adjusted basis.
C) Adjusted basis is cost basis less cost recovery deductions.
D) Tax-adjusted basis may change over time.

Question 25

Which of the following is how gain or loss realized is calculated?

A) Cash less selling costs.
B) Cost basis less cost recovery.
C) Cash less cost recovery.
D) Amount realized less adjusted basis.
E) None of the choices are correct.

Question 26

Which of the following is not usually included in an asset's tax basis?

A) Purchase price.
B) Sales tax.
C) Shipping costs.
D) Installation costs.
E) None of the choices are correct.

Question 27

Which of the following is not used in the calculation of the amount realized:

A) Cash.
B) Adjusted basis.
C) Fair market value of other property received.
D) Buyer's assumption of liabilities.
E) All of the choices are used.

Question 28

For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized.

Question 29

A loss realized for property destroyed in a hurricane is deferred under the involuntary conversion rules.

Question 30

Boot is not like-kind property involved in a like-kind exchange.

Question 31

Which of the following realized gains results in a recognized gain?

A) Farmland traded for an office building.
B) Sale to a related party.
C) Involuntary conversion.
D) Iowa cropland exchanged for a Minnesota warehouse.

Question 32

Losses on sales between related parties are realized but not recognized.

Question 33

A simultaneous exchange must take place for a transaction to qualify as a like-kind exchange.

Question 34

Realized gains are recognized unless there is specific exception.

Question 35

A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized.

Question 36

In a deferred like-kind exchange, the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

Question 37

The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last five years.

Question 38

Residential real property is not like-kind with nonresidential real property.

Question 39

An installment sale is any sale where at least a portion of the sale proceeds is received in a subsequent taxable year.

Question 40

§1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.

Question 41

Which of the following sections does not recapture or recharacterize a taxpayer's gain?

A) §1239.
B) §1250.
C) §1245.
D) §291.
E) None of the choices are correct.

Question 42

Leesburg sold a machine for $2,200 on November 10^th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg's gain or loss realized on the machine?

A) $800 gain.
B) $1,000 gain.
C) $1,200 loss.
D) $1,400 loss.
E) None of the choices are correct.

Question 43

Which of the following is true regarding depreciation recapture?

A) Changes the character of a loss.
B) Changes the character of a gain.
C) Changes the amount of a gain.
D) Only applies to ordinary assets.
E) None of the choices are correct.

Question 44

Which of the following gains does not result solely in an ordinary gain or loss?

A) Sale of equipment held for less than a year.
B) Sale of inventory.
C) Sale of equipment where the gain realized exceeds the accumulated depreciation.
D) Sale of equipment where the accumulated depreciation exceeds the gain realized.
E) None of the choices are correct.

Question 45

Which of the following results in an ordinary gain or loss?

A) Sale of a machine at a gain.
B) Sale of stock held for investment.
C) Sale of a §1231 asset.
D) Sale of inventory.
E) None of the choices are correct.

Question 46

Which of the following sections recaptures or recharacterizes only corporate taxpayers' gains?

A) §291.
B) §1239.
C) §1245.
D) Unrecaptured §1250 gains.
E) None of the choices are correct.

Question 47

Which of the following does not ultimately result in a capital gain or loss?

A) Sale of a personal use asset.
B) Sale of inventory.
C) Gain on equipment used in a trade or business and held for more than one year, if it is the only asset sale during the year.
D) Sale of capital stock in another company.
E) None of the choices are correct.

Question 48

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

A) $7,500 §1231 loss.
B) $5,000 §1231 loss.
C) $7,500 ordinary gain.
D) $7,500 capital gain.
E) None of the choices are correct.

Question 49

Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

A) $25,000 §1231 gain.
B) $20,000 ordinary gain, and $5,000 §1231 gain.
C) $5,000 ordinary gain, and $20,000 §1231 gain.
D) $25,000 capital gain.
E) None of the choices are correct.

Question 50

The sale of land held for investment results in which of the following types of gain or loss?

A) Capital.
B) Ordinary.
C) §1231.
D) §1245.
E) None of the choices are correct.

Question 51

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building 10 years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

A) $40,000 ordinary and $360,000 §1231 gain.
B) $200,000 ordinary and $200,000 §1231 gain.
C) $400,000 ordinary gain.
D) $400,000 capital gain.
E) None of the choices are correct.

Question 52

Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain?

A) $9,500 §1221.
B) $9,500 §1231.
C) $9,500 §1245.
D) $9,500 §1250.
E) None of the choices are correct.

Question 53

The sale of computer equipment used in a trade or business for nine months results in which of the following types of gain or loss?

A) Capital.
B) Ordinary.
C) §1231.
D) §1245.
E) None of the choices are correct.

Question 54

The sale for more than the original cost basis (before depreciation) of machinery used in a trade or business and held for more than one year results in which of the following types of gain or loss?

A) Capital and ordinary.
B) Ordinary only.
C) Capital and §1231.
D) §1245 and §1231.
E) None of the choices are correct.

Question 55

Which of the following is not a §1245 asset if held for more than one year?

A) Machinery.
B) Automobile.
C) Business cell phone.
D) Land.
E) None of the choices are correct.

Question 56

Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

A) $25,000 ordinary and $50,000 unrecaptured §1250 gain.
B) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.
C) $75,000 ordinary gain.
D) $75,000 capital gain.
E) None of the choices are correct.

Question 57

What is the character of land used in an active trade or business for two years?

A) Capital.
B) Ordinary.
C) §1231.
D) Investment.
E) None of the choices are correct.

Question 58

The sale at a loss of machinery that was used in a trade or business and held for more than one year results in which of the following types of loss?

A) Capital.
B) §291.
C) §1231.
D) §1245.
E) None of the choices are correct.

Question 59

Sumner sold equipment that it uses in its business for $30,000. Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

A) $10,000 §1231 loss.
B) $10,000 §1245 loss.
C) $50,000 ordinary loss.
D) $10,000 capital loss.
E) None of the choices are correct.

Question 60

Which of the following transactions results solely in §1245 gain?

A) Sale of machinery held for less than one year.
B) Sale of machinery held for more than one year, where the gain realized exceeds the accumulated depreciation.
C) Sale of machinery held for more than one year, where the accumulated depreciation exceeds the gain realized.
D) Sale of land held for more than one year, where the amount realized exceeds the adjusted basis.
E) None of the choices are correct.

Question 61

Why does §1250 recapture generally no longer apply?

A) Congress repealed the code section.
B) Real property is depreciated using the straight-line method after 1986.
C) §1245 recapture trumps §1250 recapture.
D) Because unrecaptured §1250 gains now apply to all taxpayers instead.
E) None of the choices are correct.

Question 62

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

A) The like-kind property to be received must be identified within 45 days.
B) The exchange must be completed within the taxable year.
C) The like-kind property must be received within 180 days.
D) The exchanged property must be like-kind.
E) All of the choices are correct.

Question 63

Which of the following is not true regarding §1239?

A) It only applies to related taxpayers.
B) It only applies to gains on sales of depreciable property.
C) It only applies to gains on sales of nonresidential real property.
D) It does not apply to losses.
E) None of the choices are correct.

Question 64

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

A) It only applies when a §1231 loss occurs.
B) It only applies when a §1231 gain occurs.
C) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years.
D) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 gain in the prior five years.
E) None of the choices are correct.

Question 65

When do unrecaptured §1250 gains apply?

A) When the taxpayer makes the election.
B) It applies only when noncorporate taxpayers sell depreciable real property at a gain.
C) It applies when §1245 recapture trumps §1250 recapture.
D) It applies only when real property purchased before 1986 is sold at a gain.
E) None of the choices are correct.

Question 66

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

A) Cash.
B) Other property.
C) Mortgage given.
D) Mortgage received.
E) All of the choices can be considered as boot.

Question 67

Koch traded Machine 1 for Machine 2 when the fair market value of both machines was $50,000. 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?

A) $40,000.
B) $50,000.
C) $55,000.
D) $75,000.
E) None of the choices are correct.

Question 68

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

A) The like-kind property to be received must be identified within 45 days.
B) The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year.
C) The like-kind property to be received must be identified within 180 days.
D) There is no deadline for the identification of replacement property.
E) All of the choices are correct.

Question 69

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last five 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 32 percent, what effect do the gains and losses have on Brandon's tax liability?
Use dividends and capital gains tax rates for reference.

A) $25,000 ordinary income and $8,000 tax liability.
B) $25,000 §1231 gain and $3,750 tax liability.
C) $13,000 §1231 gain, $12,000 ordinary income, and $5,790 tax liability.
D) $12,000 §1231 gain, $13,000 ordinary income, and $5,960 tax liability.
E) None of the choices are correct.

Question 70

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

A) Loss on like-kind property is not recognized.
B) Gains on boot given are deferred.
C) Losses on boot given are not recognized.
D) Land can be like-kind with a building.
E) All of the choices are true.

Question 71

Which of the following is not an involuntary conversion?

A) Destruction caused by a hurricane.
B) Eminent domain.
C) A foreclosure.
D) Fire damage.
E) All of these choices are involuntary conversions.

Question 72

A deferred like-kind exchange does not help accomplish which of the following objectives?

A) To facilitate finding replacement property.
B) To help acquire the replacement property.
C) To reduce the possibility that the seller must receive cash (boot) that will taint the transaction.
D) To certify the taxpayer's Form 8824-Like-kind exchanges.
E) All of the choices are correct.

Question 73

Alpha sold machinery that 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?

A) $20,000 ordinary income under §1239.
B) $10,000 ordinary gain and $10,000 §1231 gain.
C) $20,000 §1231 gain.
D) $20,000 capital gain.
E) None of the choices are correct.

Question 74

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

A) The basis is equal to the fair market value of the new property.
B) The basis is equal to the fair market value of the old property.
C) The basis is equal to the adjusted basis of the old property.
D) The basis is equal to the cost basis of the old property.
E) All of the choices are correct.

Question 75

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

A) $20,000.
B) $24,000.
C) $36,000.
D) $40,000.
E) None of the choices are correct.

Question 76

Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, $20,000 proceeds; (2) machinery, $25,000 cost basis, $20,000 depreciation, $10,000 proceeds; (3) furniture, $15,000 cost basis, $10,000 depreciation, $4,000 proceeds; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, $10,000 proceeds; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior five years. What are 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.

A) $3,000 ordinary loss, $0 §1231 loss.
B) $7,000 ordinary gain, $10,000 §1231 loss.
C) $7,000 ordinary loss, $4,000 §1231 gain.
D) $1,000 ordinary gain, $4,000 §1231 loss.
E) None of the choices are correct.

Question 77

Each of the following is true except for:

A) a direct involuntary conversion occurs when property taken under eminent domain is replaced with other property.
B) qualified replacement property rules are more restrictive than the like-kind property rules.
C) an indirect involuntary conversion occurs when property is destroyed and insurance proceeds are used to purchase qualified replacement property.
D) losses realized in involuntary conversions are deferred.
E) all of the choices are true.

Question 78

Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $28,000. The new land had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's recognized gain or loss on the exchange?

A) $0.
B) $2,000.
C) $7,000.
D) $9,000.
E) None of the choices are correct.

Question 79

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 32 percent, what effect do the gains and losses have on Brandon's tax liability?

A) $7,000 ordinary income, $1,000 §1231 loss, and $1,920 tax liability.
B) $6,000 ordinary income and $1,920 tax liability.
C) $7,000 §1231 gain and $2,240 tax liability.
D) $7,000 §1231 gain and $1,050 tax liability.
E) None of the choices are correct.

Question 80

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?

A) $0.
B) $45,000.
C) $60,000.
D) $105,000.
E) None of the choices are correct.