Deck 21: Property Transactions: Capital Gains and Losses

Question 1

Gains and losses are recognized when property is disposed of by gift or bequest.

Answer 1

False

Question 2

If Houston Printing Co.purchases a new printing press during the current year for $30,000,pays sales taxes of $2,000,and pays $1,000 for installation,the cost basis for the printing press is $33,000.

Answer 2

True

Question 3

Will exchanges a building with a basis of $35,000,and subject to a liability of $30,000,for land with a FMV of $50,000 owned by Jane.Jane takes the land subject to the liability.The amount realized by Will is

A)$30,000.
B)$35,000.
C)$50,000.
D)$80,000.

Answer 3

D

Question 4

Richard exchanges a building with a basis of $35,000,and subject to a liability of $25,000,for land with a FMV of $50,000 owned by Bill.Bill takes the building subject to the liability.What is the amount of Richard's realized gain?

A)$0
B)$15,000
C)$25,000
D)$40,000

Question 5

Rick sells stock of Ty Corporation,which has an adjusted basis of $20,000,for $22,000.He pays a sales commission of $500.In computing his gain or loss,the amount realized by Rick is $1,500.

Question 6

Jordan paid $30,000 for equipment two years ago and has claimed total depreciation deductions of $15,600 for the two years.The cost of repairs during the same time period was $2,000 while a major overhaul which extended the life of the equipment cost $7,000.What is Jordan's adjusted basis in the equipment at the end of the two-year period?

A)$14,400
B)$16,400
C)$21,400
D)$30,000

Question 7

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.

Question 8

Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.

Question 9

Capital recoveries increase the adjusted basis of an asset.

Question 10

A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000.The taxpayer has a realized gain of $3,000.

Question 11

Antonio owns land held for investment with a basis of $28,000.The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000.What is Antonio's realized gain?

A)$0
B)$20,000
C)$28,000
D)$48,000

Question 12

Jack exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV)of stock owned by Hayden.Hayden takes the land subject to the liability.Jack incurs $500 of selling expenses.What is the amount of Jack's realized gain on the exchange?

A)($14,000)loss
B)($14,500)loss
C)$6,500 gain
D)$7,000 gain

Question 13

Courtney sells a cottage at the lake that the family had used for their summer vacations.The purchaser paid Courtney $100,000 and assumed the mortgage which had a principal balance of $50,000.Courtney had purchased the cottage five years ago for $170,000.Courtney will recognize

A)a gain of $20,000.
B)no gain or loss.
C)a loss of $70,000.
D)a loss of $20,000.

Question 14

A taxpayer purchased an asset for $50,000 several years ago.He is now planning to sell it.Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.

Question 15

On January 1 of this year,Brad purchased 100 shares of stock at $4,000.By December 31 of this year,the stock had declined in value to $2,200,but Brad still held the shares.Brad has realized a $1,800 loss for tax purposes this year.

Question 16

Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Question 17

Which one of the following does not affect the adjusted basis of a house held as rental property?

A)depreciation deduction
B)adding a new room to the house
C)painting of more than 50% of the rooms in the home
D)installation of a completely new heating system

Question 18

All realized gains and losses are recognized for tax purposes.

Question 19

All recognized gains and losses must eventually be classified either as capital or ordinary.

Question 20

Michelle purchased her home for $150,000,and subsequently added a garage costing $25,000 and a new porch costing $5,000.Repairs to the home's plumbing cost $1,000.The adjusted basis in the home is

A)$150,000.
B)$151,000.
C)$180,000.
D)$181,000.

Question 21

If the shares of stock sold or exchanged are not specifically identified,the average cost method of identification must be used.

Question 22

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

Question 23

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen's grandfather.One year later,Kathleen sold the land for $80,000.What was her gain or (loss)on this transaction?

A)no gain or loss
B)($5,000)
C)$5,000
D)$30,000

Question 24

In a basket purchase,the total cost is apportioned among the assets purchased according to the relative adjusted basis of the assets.

Question 25

During the current year,Tony purchased new car wash equipment for use in his service station business.Tony's costs in connection with the new equipment this year were as follows: $$\begin{array} { | l | r | } \hline \text { Cost of the equipment } & \$ 45,000 \\\hline \text { Sales tax on the equipment } & 4,000 \\\hline \text { Delivery charges } & 600 \\\hline \text { Installation and testing charges } & 3,000 \\\hline \text { Expenses of operating the equipment } & 2,000 \\\hline\end{array}$$ What is Tony's basis in the car wash equipment?

A)$49,000
B)$49,600
C)$52,600
D)$54,600

Question 26

Terra Corp.purchased a new enterprise software system and incurred the following costs: $$\begin{array} { | l | r | } \hline \text { Cost of the system } & \$ 800,000 \\\hline \text { Installation of system } & 5,000 \\\hline \text { Testing of system } & 6,000 \\\hline \text { Initial training of employees } & 9,000 \\\hline\end{array}$$ What is Terra Corp.'s basis in the software system?

A)$800,000
B)$805,000
C)$811,000
D)$820,000

Question 27

For purposes of calculating depreciation,property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.

Question 28

Allison buys equipment and pays cash of $50,000,signs a note of $10,000 and assumes a liability on the property for $3,000.In addition,Allison pays an installation cost of $500 and a delivery cost of $800.Allison's basis in the asset is

A)$60,000.
B)$63,000.
C)$63,500.
D)$64,300.

Question 29

Mr.Dennis purchased a machine for use in his business.Mr.Dennis' costs in connection with this purchase were as follows: $$\begin{array} { | l | r | } \hline \text { Note to seller } & \$ 33,000 \\\hline \text { Cash paid to seller } & 5,000 \\\hline \text { State sales tax } & 2,400 \\\hline \text { Freight to place of business } & 1,500 \\\hline \text { Wages paid to workers to install } & \\\text { machine } & 4,200 \\\hline\end{array}$$ What is the amount of Mr.Dennis' basis in the machine?

A)$33,000
B)$40,400
C)$41,900
D)$46,100

Question 30

Harwood Company purchased an office building for $5,000,000 cash on April 1.Prior to renting it out to tenants on July 1,Harwood spent $1,000,000 on materials and labor to renovate the property.It funded $100,000 of the renovation cost with its own funds and borrowed the remaining $900,000.As of July 1,$10,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is

A)$5,000,000.
B)$5,100,000.
C)$6,000,000.
D)$6,010,000.

Question 31

With regard to taxable gifts after 1976,no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.

Question 32

If the shares of stock sold or exchanged are not specifically identified,the FIFO (first-in,first-out)method of identification must be used.

Question 33

Unless the alternate valuation date is elected,the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.

Question 34

Edward purchased stock last year as follows: $$\begin{array} { | l | c | r | } \hline \text { Month } & \text { Shares } & \text { Total Cost } \\\hline \text { March } & 100 & \$ 270 \\\hline \text { July } & 200 & 600 \\\hline \text { October } & 600 & \$ 1,200 \\\hline\end{array}$$ In April of this year,Edward sells 80 shares for $250.Edward cannot specifically identify the stock sold.The basis for the 80 shares sold is

A)$160.
B)$184.
C)$216.
D)$240.

Question 35

An uncle gifts a parcel of land to his niece,and he has to pay $25,000 of gift taxes.The land has appreciated substantially since he purchased it 20 year ago.The niece's basis in the land will be the uncle's cost increased by the $25,000 of gift taxes paid by the uncle.

Question 36

Taj Corporation has started construction of a new mall with a cost estimate of $50 million.The mall is expected to be ready to open in 18 months.Taj cannot deduct the interest expense on the construction loan.

Question 37

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen's grandfather.The grandfather did not have any gift taxes due.One year later,Kathleen sold the land for $110,000.What was her gain or (loss)on this transaction?

A)no gain or loss
B)($5,000)
C)$20,000
D)$25,000

Question 38

Dale gave property with a basis of $16,000 to Sarah when it had a FMV of $12,000.No gift taxes were due.Sarah later sold the property for $22,000 resulting in a recognized gain of

A)$0.
B)$4,000.
C)$6,000.
D)$12,000.

Question 39

Rachel holds 110 shares of Argon Mutual Fund.She is planning to sell 90 shares.Her record of the share purchases is noted below.What could be her basis for the 90 shares to be sold for purposes of determining gain? $$\begin{array} { | l | c | c | } \hline & \text { Cost per Share } & \text { No. of Shares } \\\hline \text { Purchase April 1, 2017 } & \$ 100 & 100 \\\hline \text { Reinvested Dividends April 1, 2018 } & \$ 150 & 10 \\\hline\end{array}$$

A)$9,000
B)$9,500
C)$9,409
D)Any of the above could be used as basis for the 90 shares sold.

Question 40

If the stock received as a nontaxable stock dividend is not the same type as the stock owned prior to the dividend,the allocation of basis is based on relative fair market values of the stock.

Question 41

Jessica owned 200 shares of OK Corporation with a basis of $12,000 and a FMV of $24,000.Jessica received 20 stock rights as a nontaxable distribution with a total FMV of $8,000.Jessica sold the stock rights for $4,000.Jessica's gain or loss on the sale was

A)$1,000.
B)$3,000.
C)$4,000.
D)($4,000).

Question 42

Dustin purchased 50 shares of Short Corporation for $500.During the current year,Short declared a nontaxable 10% stock dividend.What is the basis per share before and after the stock dividend is distributed?

A) $$\begin{array} { | l | l | } \hline \text { Before } & \text { After } \\\hline \$ 10 & \$ 9.09 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline \text { Before } & \text { After } \\\hline \$ 10 & \$ 10 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | } \hline \text { Before } & \text { After } \\\hline \$ 10 & \$ 11 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | } \hline \text { Before } & \text { After } \\\hline \$ 9.09 & \$ 10 \\\hline\end{array}$$

Question 43

Terrell and Michelle are married and living in New York,which is a not a community property state.They jointly own property with an adjusted basis of $240,000.On December 2 of this year,Michelle died when the property had a fair market value of $260,000.Terrell's basis in the property after Michelle's death is

A)$0.
B)$240,000.
C)$250,000.
D)$260,000.

Question 44

Melody inherited 1,000 shares of Corporation Zappa stock from her mother who died on March 4 of the current year.Her mother paid $30 per share for the stock on September 2,2005.The FMV of the stock on the date of death was $65 per share.On September 4 of the current year,the FMV of the stock was $70 per share.Melody sold the stock for $85 per share on December 3.The estate qualified for,and the executor elected,the alternate valuation method for these and other assets in the estate.An estate tax return was filed.What was Melody's basis in the stock on the date of the sale?

A)$30,000
B)$65,000
C)$70,000
D)$85,000

Question 45

If a nontaxable stock dividend is received and is not the same type of stock as that owned before the dividend,the original stock's basis is allocated to all shares

A)based on the par value of the stock.
B)equally to all shares owned after the stock dividend.
C)based on relative fair market values at the time of the stock dividend.
D)none of the above.

Question 46

Bob owns 100 shares of ACT Corporation common stock with a basis of $3,500 and a FMV of $12,000.Bob receives 10 stock rights as a nontaxable distribution,and no basis is allocated to the stock rights.With each stock right,Bob may acquire one share of stock for $25.Bob exercises all 10 stock rights.The total basis of the newly acquired stock is

A)$0.
B)$250.
C)$350.
D)$1,200.

Question 47

Brad owns 100 shares of AAA Corporation with a basis of $6,000 and a FMV of $24,000.Brad receives 15 stock rights as a nontaxable distribution with a total FMV of $6,000.Brad allows the stock rights to expire.Brad's loss recognized and the basis of the original 100 shares after expiration of the stock rights is

A)$0 and $4,800.
B)$0 and $6,000.
C)($1,200)and $4,800.
D)($1,200)and $6,000.

Question 48

Monte inherited 1,000 shares of Corporation Zero stock from his father who died on March 4 of the current year.His father paid $30 per share for the stock on September 2,2005.The FMV of the stock on the date of death was $50 per share.On September 4 this year,the FMV of the stock was $55 per share.The executor did not elect the alternate valuation date.Monte sold the stock for $65 per share on December 3.What is the amount and nature of any gain or loss?

A)$10,000 LTCG
B)$35,000 LTCG
C)$15,000 LTCG
D)$15,000 STCG

Question 49

David gave property with a basis of $133,000 to Hannah when the property had a FMV of $100,000 and paid gift taxes of $8,000.If Hannah later sells the property for $140,000,Hannah's basis (to determine gain)in the property immediately before the sale is

A)$100,000.
B)$108,000.
C)$133,000.
D)$141,000.

Question 50

Douglas and Julie are a married couple who live in Louisiana,a community property state.They jointly own property with an adjusted basis of $140,000.On December 2 of this year,Julie died when the property had a fair market value of $160,000.Douglas's basis in the property after Julie's death is

A)$0.
B)$140,000.
C)$150,000.
D)$160,000.

Question 51

During the current year,Don's aunt Natalie gave him a house.At the time of the gift,the house had a FMV of $145,000 and his aunt's adjusted basis was $134,000.After deducting the annual exclusion,the amount of the gift was $130,000.His aunt paid a gift tax of $20,000 on the house.What is Don's basis in the house for purposes of determining gain?

A)$130,000
B)$134,000
C)$135,692
D)$145,000

Question 52

In a common law state,jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to

A)the decedent's basis before death.
B)the total fair market value of the entire property at the date of death (the alternative valuation date was not elected).
C)half of the fair market value of the entire property at the date of death (the alternative valuation date was not elected).
D)half of the basis just before death,plus half of the fair market value at the date of death (the alternative valuation date was not elected).

Question 53

In the current year,Andrew received a gift of property from his uncle.At the time of the gift,the property had a FMV of $115,000 and an adjusted basis to his uncle of $70,000.After deducting the annual exclusion,the amount of the gift was $100,000.Andrew's uncle paid a gift tax on the property of $24,000.What is the amount of Andrew's basis in the property?

A)$70,000
B)$80,800
C)$94,000
D)$115,000

Question 54

Billy and Sue are married and live in Texas,a community property state.They jointly own real property with an adjusted basis of $200,000.When the property has a FMV of $450,000,Billy dies leaving all of the property to Sue.If she later sells the property for $650,000,what is Sue's gain on the sale?

A)$200,000
B)$225,000
C)$325,000
D)$450,000

Question 55

In 2017,Toni purchased 100 shares of common stock in Blue Corporation for $5,280.In 2018,Blue declared a stock dividend of one share of its common stock for each 10 shares held.In 2019,Blue's common stock split 2-for-1 at a time when the FMV was $80 a share.What is Toni's basis in each of her shares of the Blue Corporation stock if both of the earlier stock dividends were tax-free?

A)$24 per share
B)$48 for 110 shares and $0 for all additional shares
C)$52.80 for 100 shares and $0 for all additional shares
D)$80 per share

Question 56

Jamahl and Indira are married and live in a common law state.They jointly own real property with an adjusted basis of $200,000.When the property has a FMV of $450,000,Jamahl dies leaving all of the property to Indira.If she later sells the property for $700,000,what is Indira's gain on the sale?

A)$250,000
B)$475,000
C)$375,000
D)$500,000

Question 57

In a community property state,jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to

A)the decedent's basis before death.
B)the total fair market value of the entire property at the date of death (if the alternative valuation date was not elected).
C)half of the fair market value of the entire property at the date of death (if the alternative valuation date was not elected).
D)half of the basis just before death,plus half of the fair market value at the date of death (if the alternative valuation date was not elected).

Question 58

Josh purchases a personal residence for $278,000 but subsequently converts the property to rental property when its FMV is $275,000.Assume depreciation of $65,000 has been deducted after conversion to rental use.If Josh sells the property for $280,000,his gain or loss will be

A)$2,000 gain.
B)$5,000 gain.
C)$67,000 gain.
D)$70,000 gain.

Question 59

Tina purchases a personal residence for $278,000,but subsequently converts the property to rental property when its FMV is $275,000.Assume depreciation of $65,000 has been deducted after conversion to rental use.If Tina sells the property for $200,000,her realized gain or loss will be

A)($10,000)loss.
B)($13,000)loss.
C)($75,000)loss.
D)($78,000)loss.

Question 60

Joycelyn gave a diamond necklace to her granddaughter Emma.Joycelyn had purchased the necklace in 1980 for $20,000.The FMV of the necklace at the time of the gift was $50,000.After deducting the annual exclusion,the amount of the gift was $35,000.Gift taxes of $10,000 were paid.What is Emma's adjusted basis in the necklace?

A)$20,000
B)$28,571
C)$30,000
D)$50,000

Question 61

If an individual taxpayer's net long-term capital losses exceed the net short-term capital gains,the excess may be offset against ordinary income up to $3,000 per year.Any excess losses over $3,000 may be carried over indefinitely.

Question 62

If an individual taxpayer's net long-term capital losses exceed the net short-term capital gains,the excess may be offset against ordinary income up to $3,000 per year.Any excess losses over $3,000 may be carried back three years and carried forward five years.

Question 63

If a capital asset held for one year or more is sold at a gain,the gain is classified as long-term capital gain.

Question 64

Taxpayers who own mutual funds recognize their share of capital gains even if no distributions are received.

Question 65

All of the following are capital assets with the exception of

A)personal residence.
B)corporate stock held for investment.
C)equipment used in a trade or business.
D)a Rembrandt painting held in a private collection.

Question 66

Generally,gains resulting from the sale of collectibles such as antiques,stamps,or artwork are taxed to individual taxpayers at a maximum rate of 25%.

Question 67

A building used in a trade or business is a capital asset.

Question 68

An individual taxpayer who is not a dealer in real estate plans to subdivide a parcel of land into four lots and sell them at a substantial gain.The parcel of land had been held six years.In order to qualify for capital gain treatment,the individual must satisfy all of the requirements except

A)the individual must not hold any other real property primarily for sale in the ordinary course of business.
B)no substantial improvements can be made while holding the lots if the improvements substantially increase the value of the lots.
C)the parcel of land (or any part of it)cannot have been held primarily for sale to customers in the individual's business.
D)All of the above criteria must be satisfied to allow capital gain treatment.

Question 69

A single taxpayer realizes long-term capital gains in 2019.Her taxable income puts her in the 37% tax bracket.She will enjoy a substantial tax savings due to the 15% preferential tax rate that will apply to her adjusted net capital gain.

Question 70

Bad debt losses from nonbusiness debts are deductible as short-term or long-term capital losses depending on how long the debt was outstanding.

Question 71

Section 1221 of the Code includes a comprehensive list of assets properly classified as capital assets.

Question 72

Which of the following is not a capital asset?

A)a patent developed by the taxpayer
B)a family's cottage at the beach
C)a husband's wedding ring
D)All of the above are capital assets.

Question 73

Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses.

Question 74

When an individual taxpayer has NSTCL and NLTCG,the loss is offset against NLTCG from the 28% group,then NLTCG from the 25% group,and finally against NLTCG from the 15% or 20% group.

Question 75

Which one of the following is a capital asset?

A)automobile held by car dealer for sale
B)automobile used for personal purposes
C)automobile used in taxpayer's trade or business
D)B and C only

Question 76

Mike,a dealer in securities and calendar-year taxpayer,purchased a security for inventory on November 18,2018 for $15,000.The FMV on December 31,2018 was $16,000.The security was sold on December 19,2019 for $16,500.These transactions result in

A)$0 ordinary income in 2018; $1,500 ordinary income in 2019.
B)$0 ordinary income in 2018; $1,500 LTCG in 2019.
C)$1,000 ordinary income in 2018; $500 LTCG in 2019.
D)$1,000 ordinary income in 2018; $500 ordinary income in 2019.

Question 77

Section 1221 specifically states that inventory or property held primarily for sale to customers is not classified as a capital asset of the trade or business.

Question 78

Kate subdivides land held as an investment and Section 1237 is satisfied.The lots sell for $30,000 per lot (basis $10,000).Kate sells five lots in the first year.Kate's ordinary income is

A)$0.
B)$20,000.
C)$100,000.
D)$150,000.

Question 79

Normally,a security dealer reports ordinary income on the sale of securities unless it is specifically identified as a security being held for investment.

Question 80

A nonbusiness bad debt is deductible only in the year in which the debt becomes totally worthless.