Question 1

Which of the following is correct?
A) The Section 1231 lookback rule converts potential long-term capital gain into ordinary income.
B) The Section 1231 lookback rule converts ordinary gain into ordinary loss.
C) The Section 1231 lookback rule converts casualty gain into long-term capital gain.
D) The Section 1231 lookback rule applies only to realty.

Accepted Answer

The Section 1231 lookback rule applies to taxpayers who have a net Section 1231 gain (the net result of gains and losses from the disposition of property used in trade or business) and who have had a net Section 1231 loss in any of the previous five years. The lookback rule converts any current year net Section 1231 gain into ordinary income to the extent of any unrecaptured net Section 1231 losses in the past five years. Therefore, choice A is correct.

Question 2

Carol used her auto 60 percent for business and 40 percent for personal use. She purchased it for $10,800 and has taken $3,992 of depreciation on it. What is her recognized gain on a sale for $7,800 and what is it character?
A) $6,808 Section 1231 gain
B) $3,808 Section 1245 recapture
C) $2,192 Section 1245 recapture
D) $992 Section 1231 gain

Accepted Answer

To start, we need to determine the adjusted basis of Carol's auto. Since she used it 60% for business, we can allocate 60% of its cost and depreciation to business use:
60% of $10,800 = $6,480 basis allocated to business use
60% of $3,992 depreciation = $2,395.20 depreciation allocated to business use
Adjusted basis = $10,800 - $2,395.20 = $8,404.80

Next, we need to calculate the amount of gain or loss on the sale. Since Carol sold the auto for $7,800, we need to compare that to her adjusted basis:
$7,800 - $8,404.80 = ($604.80) loss

However, since this is a business asset, we need to take into account the character of the gain or loss. Since the auto is considered "Section 1245 property", which includes most tangible personal property used in a trade or business, the portion of the loss that is due to depreciation (i.e. the difference between the adjusted basis and the sale price) is treated as ordinary income and is subject to "recapture".

The amount of recapture is equal to the lesser of the depreciation claimed or the gain on the sale. In this case, since there is a loss instead of a gain, we would recapture all of the depreciation claimed:
$3,992 Section 1245 recapture

Therefore, the correct answer is C, $2,192 Section 1245 recapture.

Question 3

During the current year, Mrs. Mayhew received a used computer as a gift from her son for her personal use. The computer has a current fair market value of $350 and cost her son $850. He took $400 of depreciation deductions while it was used in his business. Mrs. Mayhew uses the computer for several years and then sells it for $200. What is the amount and type of gain or loss that Mrs. Mayhew recognizes on the sale?
A) $0 gain or loss
B) $150 Section 1245 loss
C) $150 Section 1231 loss
D) $250 Section 1231 loss

Accepted Answer

Mrs. Mayhew recognizes $0 gain or loss on the sale because the computer was a gift, and its sale price ($200) is less than its adjusted basis (original cost minus depreciation, $850 - $400 = $450). Since it was used for personal use, any potential loss is not deductible.

Question 4

Lopez Corporation sold equipment that it had purchased for $300,000 ($100,000 cash and a note for $200,000) four years ago. As of the date of sale, Lopez had claimed $187,500 in accumulated depreciation on this equipment and had made $50,000 in principal payments on the note. Lopez received $80,000 cash and a note for $100,000 in addition to the purchaser assuming Lopez's $150,000 note on the equipment. What percentage of Lopez Corporation's realized gain on the sale will be taxed as ordinary income due to depreciation recapture?
A) 100%
B) 86.2%
C) 62.5%
D) 0

Accepted Answer

The realized gain on the sale is calculated as follows:

Sale price of equipment: $80,000 + $100,000 + $150,000 (assumed note) = $330,000
Book value of equipment: $300,000 (original cost) - $187,500 (accumulated depreciation) - $50,000 (principal payments) = $62,500
Realized gain: $330,000 - $62,500 = $267,500

Of the realized gain, $187,500 is due to accumulated depreciation (i.e. depreciation recapture) and will be taxed as ordinary income. Therefore, the percentage of the realized gain that will be taxed as ordinary income is:

($187,500 ÷ $267,500) × 100% ≈ 69.91%

However, because the purchaser assumed Lopez's $150,000 note on the equipment, we need to adjust the calculation to account for the remaining amount of the note that was not yet paid off by Lopez. The adjusted calculation is:

Sale price of equipment: $80,000 + $100,000 = $180,000
Book value of equipment: $62,500 + ($150,000 - $50,000) = $162,500
Realized gain: $180,000 - $162,500 = $17,500

Of the realized gain, $187,500 is still due to accumulated depreciation and will be taxed as ordinary income. Therefore, the percentage of the realized gain that will be taxed as ordinary income is:

($187,500 ÷ $17,500) × 100% = 86.2%

Question 5

Melody works in her home using a computer she purchased two years ago for $2,500. The total adjusted basis for the computer is now $1,000. Her husband and children used the computer 20 percent of the time to play computer games and for personal correspondence. She sells the computer for $1,200. How much and what kind of gain does Melody recognize?
A) $200 capital gain
B) $200 Section 1245 recapture
C) $200 Section 1231gain
D) $460 Section 1245 recapture

Accepted Answer

Melody's total adjusted basis for the computer is $1,000, and she sells it for $1,200, resulting in a $200 gain. However, since her husband and children used the computer for personal purposes, 20 percent of the gain is subject to Section 1245 recapture.

20 percent of $1,000 (the adjusted basis) is $200. Therefore, Melody recognizes a $200 Section 1245 recapture gain.

Question 6

Martone Corporation sells two machines and a warehouse it has been using for storage in the current tax year. Each of the machines cost $25,000 and has an adjusted basis of $11,000 when each was sold for $14,000. The warehouse cost $105,000, has an adjusted basis of $60,000 and is sold for $95,000. All assets were depreciated using MACRS depreciation. What is the amount and type of gain recognized by Martone on the sale of these assets?
A) $6,000 Section 1245 recapture; $35,000 Section 1231 gain
B) $6,000 Section 1245 recapture; $7,000 Section 291 recapture; $28,000 Section 1231 gain
C) $6,000 section 1245 recapture; $35,000 Section 291 recapture
D) $41,000 capital gain

Accepted Answer

The gain recognized on the sale of each machine is calculated as follows:

Sale Price - Adjusted Basis = Gain Recognized

$14,000 - $11,000 = $3,000 per machine

Since the machines were depreciated using MACRS depreciation, the gain recognized is a Section 1245 recapture.

The gain recognized on the sale of the warehouse is calculated as follows:

Sale Price - Adjusted Basis = Gain Recognized

$95,000 - $60,000 = $35,000

Since the warehouse was also depreciated using MACRS depreciation, the gain recognized is a Section 1231 gain.

Therefore, the total gain recognized by Martone on the sale of these assets is:

2 (Section 1245 recapture of $3,000 each) + Section 1231 gain of $35,000 = $7,000 Section 291 recapture; $28,000 Section 1231 gain. Answer B is the correct answer.

Question 7

The Walford Partnership (owned by two individuals) sold an apartment building for $300,000 that it purchased for $280,000 ten years ago. The partnership took $80,000 of depreciation deductions on the building. What is the amount and type of gain realized by the partnership on the sale and taxed to the individual partners?
A) $16,000 Section 1250 unrecaptured gain; $84,000 Section 1231 gain
B) $80,000 Section 1245 recapture; $20,000 Section 1231 gain
C) $80,000 Section 1250 unrecaptured gain; $20,000 Section 1231 gain
D) $100,000 Section 1231 gain

Accepted Answer

The gain realized on the sale is calculated by subtracting the adjusted basis (original cost minus depreciation) from the sale price. The adjusted basis is $280,000 - $80,000 = $200,000. The sale price is $300,000, so the total gain is $300,000 - $200,000 = $100,000. Of this, $80,000 is Section 1250 unrecaptured gain, representing the depreciation recapture on real property, and the remaining $20,000 is Section 1231 gain, representing the profit over the original cost and depreciation recaptured.

Question 8

Jason sells a piece of equipment for $43,000. The equipment was purchased four years ago for $56,000. It was depreciated using an accelerated method of depreciation. Its adjusted basis at the time of sale is $21,000. Straight-line depreciation would have been only $20,000. What is the amount and type of gain Jordan recognizes on this sale?
A) $22,000 Section 1231 gain
B) $22,000 Section 1245 gain
C) $22,000 capital gain
D) $1,000 Section 1250; $21,000 Section 1231 gain

Accepted Answer

To calculate the gain, we need to compare the amount for which the equipment was sold ($43,000) with its adjusted basis at the time of the sale ($21,000). The difference is the amount of gain recognized by Jason.

$43,000 - $21,000 = $22,000

Since the equipment was depreciated using an accelerated method, the gain is considered a Section 1245 gain. Therefore, choice B is the correct answer.

Question 9

A corporation sells a machine used in its business for 9 years for $22,000. The machine originally cost $120,000 and was fully depreciated. Its gain will be treated as:
A) Capital gain
B) Section 1231 gain
C) Section 1245 recapture
D) Section 1250 recapture

Accepted Answer

Section 1245 recapture applies because the gain on the sale of depreciable personal property (like a machine) is treated as ordinary income to the extent of depreciation taken. Since the machine was fully depreciated, the entire gain is subject to Section 1245 recapture.

Question 10

Caldwell Corporation sold a factory building for $300,000 that it originally purchased for $600,000. It had an adjusted basis of $200,000 due to having taken $400,000 of depreciation. What is Caldwell's Section 1231 gain on the sale of the property?
A) $400,000
B) $300,000
C) $100,000
D) $80,000

Accepted Answer

The answer of Caldwell Corporation sold a factory building for...

Question 11

Quidik Corporation sold a machine for $80,000 that it had acquired three years ago for $68,000. If its adjusted basis when sold was $50,000, what should Quidik report on its tax return as a result of this sale?
A) Section 1245 recapture of $18,000; Section 1231 gain of $30,000;
B) Ordinary income of $12,000 and Section 1231 gain of $18,000
C) Section 1245 recapture of $18,000 and Section 1231 gain of $12,000;
D) Section 1231 gain of $38,000

Accepted Answer

The $18,000 section 1245 recapture is the difference between the selling price and the adjusted basis. The $12,000 section 1231 gain is the difference between the selling price and the original cost ($80,000 - $68,000 = $12,000). Therefore, the correct answer is (C) Section 1245 recapture of $18,000 and Section 1231 gain of $12,000.

Question 12

Donza Company has unrecaptured Section 1231 losses from the two previous years totaling $25,000 and a $32,000 Section 1231 gain in the current year. Based on this information, all of the following statements concerning Donza's taxable income for the current year are correct except:
A) Taxable ordinary income is $25,000
B) Taxable capital gain is $7,000
C) The amount taxable as ordinary income is the lesser of the unrecaptured losses or the current Section 1231 gain
D) Unrecaptured Section 1231 losses are taxable as capital gain

Accepted Answer

Unrecaptured Section 1231 losses are not taxable as capital gains; instead, they are used to offset current year Section 1231 gains, recharacterizing them as ordinary income to the extent of the previous losses.

Question 13

During the current tax year, the Jeckel Company has the following gains and losses from property transactions: $12,000 Section 1231 gain
$23,000 long-term capital gain
$21,000 Section 1231 loss
$4,000 Section 1231 gain
What is the amount and type of gain or loss reported by Jeckel for the year?
A) $21,000 Section 1231 loss; $39,000 capital gain
B) $16,000 Section 1231 gain; $21,000 Section 1231 loss; $23,000 capital gain
C) $18,000 net capital loss
D) $5,000 net Section 1231 loss; $23,000 capital gain

Accepted Answer

Section 1231 gains and losses are netted against each other. Here, $12,000 gain + $4,000 gain - $21,000 loss equals a $5,000 net Section 1231 loss. The $23,000 long-term capital gain remains unaffected.

Question 14

Paul has a $45,000 net Section 1231 gain in the current tax year from his only property transaction. Last year he had a $12,000 net Section 1231 gain, but two years ago he had a $51,000 net Section 1231 loss. If he has no other property transactions in the current year, how will Paul treat his net Section 1231 gains this year?
A) $45,000 long-term capital gain
B) $45,000 ordinary income
C) $39,000 ordinary income; $6,000 Section 1245 gain
D) $39,000 ordinary income; $6,000 long-term capital gain

Accepted Answer

The $45,000 net Section 1231 gain this year is treated as a long-term capital gain. However, because Paul had a $51,000 net Section 1231 loss two years ago, the net Section 1231 gain this year to the extent of the prior loss ($51,000) is treated as ordinary income. Since he had a $12,000 net Section 1231 gain last year, this reduces the $51,000 loss carryover to $39,000. Therefore, $39,000 of this year's gain is treated as ordinary income due to the recapture rule, leaving $6,000 ($45,000 - $39,000) to be treated as long-term capital gain.

Question 15

Which of the following comparisons is correct?
A) Both individual and corporate long-term capital losses carryover as short-term capital losses.
B) Individuals may only carry forward capital losses for five years; corporations may carry forward capital losses indefinitely;
C) Both individuals and corporations may use the 15% tax rate on net capital gains.
D) Corporations may carry back capital losses; individuals may not.

Accepted Answer

Corporations have the ability to carry back capital losses to offset prior years' income, a provision not available to individual taxpayers. This allows corporations to amend past tax returns to reflect the capital loss and potentially receive a refund for taxes paid in those years. Individuals, on the other hand, can only carry forward capital losses to offset future capital gains and up to $3,000 of other income annually.

Question 16

Lopez Corporation sold equipment that it had purchased for $300,000 ($100,000 cash and a note for $200,000) four years ago. As of the date of sale, Lopez had claimed $187,500 in accumulated depreciation on this equipment and had made $50,000 in principal payments on the note. Lopez received $80,000 cash and a note for $100,000 in addition to the purchaser assuming Lopez's $150,000 note on the equipment. How much of Lopez Corporation's realized gain on the sale will be a net Section 1231 gain?
A) $30,000
B) $142,500
C) $212,500
D) $187,500

Accepted Answer

The answer of Lopez Corporation sold equipment that it had...

Question 17

Angel sells the following depreciable assets from her sole proprietorship: Asset Cost Age Gain/Loss
Office furniture $10,000 4 years ($2,400)
Truck $20,000 5 years 3,100
Bakery equipment $25,000 9 months (4,500)
What should Angel report on her income tax return relative to each of these property transactions?
A) $3,800 capital loss
B) $3,100 Section 1245 recapture; $2,400 Section 1231 loss; $4,500 ordinary loss
C) $3,800 ordinary loss
D) $700 Section 1231 gain; $4,500 ordinary loss

Accepted Answer

Office furniture: This is a Section 1231 loss because the sale resulted in a loss and the property was held for more than one year. The loss of $2,400 can be used to offset any other Section 1231 gains that Angel may have for the year.

Truck: This is a Section 1245 recapture because the sale resulted in a gain and the property was used in Angel's business for less than one year. The gain of $3,100 will be treated as ordinary income.

Bakery equipment: This is an ordinary loss because the sale resulted in a loss and the property was held for less than one year. The loss of $4,500 can be used to offset any other ordinary income that Angel may have for the year.

Question 18

Kevin owns a rental apartment building that he purchased several years ago for $100,000. He has claimed accumulated depreciation of $60,000 on this building. In 2018 he sells the building for $110,000. If Kevin is in the 32% marginal tax bracket and has no other property transactions this year, what tax rate or rates apply to his gain from the sale of this building?
A) 32% and 25%
B) 32% and 15%
C) 25% and 15%
D) 15% only

Accepted Answer

Kevin's gain is split into two parts: the recaptured depreciation taxed at 25% and the remaining gain taxed at the long-term capital gains rate of 15%.

Question 19

Bobsy Company has a $14,000 net Section 1231 gain for the current tax year from its only property transaction. In the previous year, it had a $7,000 net Section 1231 loss. For the current year, the net Section 1231 gain will be taxed as:
A) A $14,000 ordinary income
B) A $14,000 capital income
C) A $7,000 ordinary income and a $7,000 long-term capital gain
D) A $7,000 ordinary income and a $7,000 short-term capital gain

Accepted Answer

When a taxpayer has a net Section 1231 gain for the year, it's taxed as long-term capital gain (LTCG). If they have a net Section 1231 loss, it's treated as an ordinary loss.

In this case, Bobsy Company had a net Section 1231 loss of $7,000 in the previous year. Therefore, they're now allowed to offset up to $7,000 of the current year's $14,000 Section 1231 gain against ordinary income. The remaining $7,000 will be taxed as LTCG.

Hence, the correct answer is C.

Question 20

An individual taxpayer has the following property transactions during the current year: Personal automobile owned 3 years $4,000 loss on sale
Business equipment owned 3 years $5,600 gain on sale
Factoring of receivables $6,200 loss
Common stock owned 7 months $3,500 gain on sale
How do these transactions affect the individual's AGI?
A) AGI is increased by $2,900
B) AGI is decreased by $1,100
C) AGI is increased by $9,100
D) AGI is decreased by $2,900

Accepted Answer

The answer of An individual taxpayer has the following property...

Quiz 8: Property Dispositions

Which of the following is correct?

Carol used her auto 60 percent for business and 40 percent for personal use. She purchased it for $10,800 and has taken $3,992 of depreciation on it. What is her recognized gain on a sale for $7,800 and what is it character?

A corporation sells a machine used in its business for 9 years for $22,000. The machine originally cost $120,000 and was fully depreciated. Its gain will be treated as:

Caldwell Corporation sold a factory building for $300,000 that it originally purchased for $600,000. It had an adjusted basis of $200,000 due to having taken $400,000 of depreciation. What is Caldwell's Section 1231 gain on the sale of the property?

Quidik Corporation sold a machine for $80,000 that it had acquired three years ago for $68,000. If its adjusted basis when sold was $50,000, what should Quidik report on its tax return as a result of this sale?

Donza Company has unrecaptured Section 1231 losses from the two previous years totaling $25,000 and a $32,000 Section 1231 gain in the current year. Based on this information, all of the following statements concerning Donza's taxable income for the current year are correct except:

During the current tax year, the Jeckel Company has the following gains and losses from property transactions: $12,000 Section 1231 gain $23,000 long-term capital gain $21,000 Section 1231 loss $4,000 Section 1231 gain What is the amount and type of gain or loss reported by Jeckel for the year?

Which of the following comparisons is correct?

Bobsy Company has a $14,000 net Section 1231 gain for the current tax year from its only property transaction. In the previous year, it had a $7,000 net Section 1231 loss. For the current year, the net Section 1231 gain will be taxed as: