Deck 14: Property Transactions: Determination of Gain or Loss and Basis Considerations

Question 1

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made. The amount of the amortized premium is treated as an interest deduction.

Answer 1

True

Question 2

The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the shareholder- recipient's basis in the stock investment is treated as a capital gain.

Answer 2

True

Question 3

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922. Milton's adjusted basis for the building at the end of the first year is $195,078 $200,000 - $4,922).

Answer 3

True

Question 4

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Question 5

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Question 6

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Question 7

A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Question 8

In computing the amount realized when the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used.

Question 9

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Question 10

If Wal-Mart stock increases in value during the tax year by $6,000, the amount realized is a positive $6,000.

Question 11

A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Question 12

If a seller assumes the buyer's liability on the property acquired, the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Question 13

If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in recognized gain, but cannot result in a recognized loss.

Question 14

Reggie owns all the stock of Amethyst, Inc. adjusted basis of $100,000). If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Question 15

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Question 16

Monroe's delivery truck is damaged in an accident. Monroe's adjusted basis for the delivery truck prior to the accident is $20,000. If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his adjusted basis for the delivery truck after the accident is $21,000.

Question 17

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Question 18

A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized.

Question 19

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium. On the later sale of the bond for $10,800, she has amortized $300 of the premium. Helen has a recognized gain of $800 $10,800 amount realized - $10,000 adjusted basis).

Question 20

In a deductible casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Question 21

The holding period for nontaxable stock dividends that are the same type i.e., common on common) includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are not the same type i.e., preferred on common) is new and begins on the date the dividend is received.

Question 22

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.

Question 23

The holding period for property acquired by gift is automatically long term.

Question 24

Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.

Question 25

The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift assuming no gift taxes are paid). The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.

Question 26

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Question 27

Parker bought a brand new Ferrari on January 1, 2018, for $125,000. Parker was fatally injured in an auto accident on June 23, 2018, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on January 1, 2018.

Question 28

For nontaxable stock rights where the fair market value of the rights is 15% or more of the fair market value of the stock, the taxpayer is required to allocate a portion of the stock basis to the stock rights.

Question 29

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Question 30

If a husband inherits his deceased wife's share of jointly owned property in a common law state, both the husband's original share and the share inherited from the deceased wife are stepped-up or down to the fair market value at the date of the wife's death.

Question 31

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot
identify the lot of stock that is being sold, he should use either a weighted average approach or a LIFO approach.

Question 32

If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding period of the seller.

Question 33

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Question 34

In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt. The aunt had owned the stock adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer. Fran's basis in the stock is $75,000-the lesser of $77,000 $50,000 + $27,000) or $75,000.

Question 35

If the alternate valuation date is elected by the executor in 2018, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

Question 36

If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.

Question 37

For the loss disallowance provision under § 267, related parties include certain family members, a shareholder and his or her controlled corporation i.e., greater than 50% in value of the corporation's outstanding stock), and a partner and his or her controlled partnership i.e., greater than 50% of the capital interests or profits interest in the partnership).

Question 38

Transactions between related parties that result in disallowed losses might later provide a tax benefit to the related party buyer.

Question 39

Wade is a salesman for a real estate development company. Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000. Wade must recognize a gain of $10,000 $100,000 developer's adjusted basis
- $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 $90,000 cost + $10,000 recognized gain).

Question 40

Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method associated with the purchase of a business.

Question 41

The wash sales rules apply to both gains and losses.

Question 42

The terms "realized gain" and "recognized gain" can be used interchangeably; they mean the same thing.

Question 43

Broker's commissions, legal fees, and points paid by the seller reduce the seller's amount realized.

Question 44

Ben sells stock adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000. Ray gives the stock
to his daughter, Trish, who subsequently sells it for $26,000. Ben's recognized loss is $0 and Trish's recognized gain is
$1,000 $26,000 - $15,000 - $10,000).

Question 45

The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

Question 46

Nontaxable stock dividends result in no change to the total basis of the old and new stock, but the basis per share decreases.

Question 47

If property that has been converted from personal use to business use has appreciated in value, its basis for gain will be the same as the basis for loss.

Question 48

The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

Question 49

Gene purchased an SUV for $45,000 which he uses 100% for personal purposes. When the SUV is worth $30,000, he contributes it to his business. The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is
$45,000.

Question 50

A loss from the sale of a personal use asset that would be disallowed cannot be recognized even if the taxpayer converts the asset to business use prior to its sale.

Question 51

In general, the amount realized from a sale of property does not include any liability assumed by the buyer.

Question 52

The adjusted basis of an asset is the original cost or basis) plus capital recoveries less capital additions.

Question 53

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Question 54

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

A) $0
B) $45,000
C) $163,000
D) $208,000
E) None of the above

Question 55

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?

A) $1,350,000
B) $1,378,000
C) $1,385,000
D) $1,413,000
E) None of the above

Question 56

Albert purchased a tract of land for $140,000 in 2015 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2018 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2018?

A) $40,000
B) $60,000
C) $80,000
D) $100,000
E) None of the above

Question 57

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

Question 58

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Question 59

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Question 60

The basis of property acquired in a bargain purchase is its cost.

Question 61

Nontaxable stock dividends result in:

A) A higher cost per share for all shares than before the stock dividend.
B) A lower cost per share for all shares than before the stock dividend.
C) An increase in the total cost of the old and new stock combined.
D) A decrease in the total cost of the old and new stock combined.
E) None of the above.

Question 62

Capital recoveries include:

A) The cost of capital improvements.
B) Ordinary repair and maintenance expenditures.
C) Payments made on the principal of a mortgage on taxpayer's building.
D) Amortization of bond premium.
E) All of the above.

Question 63

In 2014, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2018. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?

A) $0
B) $13,000
C) $15,000
D) $18,000
E) None of the above

Question 64

Joyce's office building was destroyed in a fire adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?

A) $0
B) $10,000 loss
C) $10,000 gain
D) $40,000 gain
E) None of the above

Question 65

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?

A) $0
B) $4,000)
C) $10,000)
D) $18,000)
E) None of the above

Question 66

Jason owns Blue Corporation bonds face value of $10,000), purchased on January 1, 2018, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027. If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 assuming straight-line amortization is appropriate)?

A) $300 and $11,000
B) $300 and $10,900
C) $200 and $11,000
D) $200 and $10,900
E) None of the above

Question 67

Janice bought her house in 2009 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2018. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Don buys the house for $500,000 in cash and assumes her mortgage of $194,000. What is Janice's adjusted basis at the date of the sale and the amount realized?

A) $370,000 adjusted basis; $661,400 amount realized.
B) $370,000 adjusted basis; $659,000 amount realized.
C) $370,000 adjusted basis; $665,200 amount realized.
D) $325,000 adjusted basis; $663,200 amount realized.
E) $325,000 adjusted basis; $694,000 amount realized.

Question 68

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
E) None of the above.

Question 69

In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri's gain basis for the stock?

A) $7,500
B) $8,350
C) $9,017
D) $20,000
E) None of the above

Question 70

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

A) $0
B) $3,000
C) $17,000
D) $20,000
E) None of the above

Question 71

Gift property disregarding any adjustment for gift tax paid by the donor):

A) Has no basis to the donee because he or she did not pay anything for the property.
B) Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.
C) Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a loss, and the fair market value on the date of gift was less than the donor's adjusted basis.
D) Has no basis to the donee if the fair market value on the date of gift is less than the donor's adjusted basis.
E) None of the above.

Question 72

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

A) $0
B) $12,000
C) $13,000)
D) $25,000)
E) None of the above

Question 73

Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?

A) $0
B) $500)
C) $2,700)
D) $6,500
E) None of the above

Question 74

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2018, for $11,000. The maturity date is December 31, 2027. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2018, and the adjusted basis for the bonds at the end of 2018, assuming straight-line amortization is appropriate?

A) $0 and $11,000
B) $0 and $10,900
C) $100 and $11,000
D) $100 and $10,900
E) None of the above

Question 75

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1995 when he acquired 30 shares for $20 a share. In 2002, Alfred bought 150 shares at $10 a share. In 2017, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year 2018). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?

A) $1,250
B) $3,520
C) $5,950
D) $6,250
E) None of the above

Question 76

Which of the following statements is false?

A) A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
B) A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
C) A realized loss that is never recognized results in the permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
D) A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer's cost or other basis for tax purposes.
E) All of the above.

Question 77

Ralph gives his daughter, Angela, stock basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

A) $0
B) $2,000
C) $4,000
D) $10,000
E) None of the above

Question 78

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

A) $0
B) $38,000
C) $70,000
D) $110,000
E) None of the above

Question 79

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot?
Recognized gain Basis

A) $0 $ 75,000
B) $0 $ 90,000
C) $15,000 $ 75,000
D) $15,000 $ 90,000
E) $30,000 $105,000

Question 80

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,040 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,580 to the seller at closing. Karin's adjusted basis for the real estate is:

A) $374,580.
B) $375,000.
C) $375,420.
D) $379,620.
E) None of the above.