Question 1

Becky bought a home with her husband, Ken, in 2004 for $125,000. They were divorced in 2013 and Becky became sole owner of the home under the divorce decree. On January 5, 2017, Becky married Michael. Michael and Becky have been living in the house since their marriage but they are planning now to move. If Michael and Becky sell their home on December 15, 2018 for $500,000, how much taxable gain must they report on their 2018 joint tax return?

Accepted Answer

The answer of Becky bought a home with her husband,...

Question 2

Kelly, a single individual, has $15,000 of taxable income before a long-term capital gain of $5,000 on the sale of some stock owned for two years that she sold in 2018. What is the tax rate applied to this gain?

Accepted Answer

For the tax year 2018, individuals with taxable income (including their long-term capital gains) that falls within the 10% or 12% ordinary income tax brackets are subject to a 0% tax rate on those gains. Kelly's total taxable income, including her long-term capital gain, would be $20,000, which would place her in the 12% ordinary income tax bracket for a single filer in 2018. Therefore, her long-term capital gain would be taxed at 0%.

Question 3

Clem and Chloe, a married couple, sell their principal residence that they have owned and occupied for the past twenty years. The adjusted basis for the residence is $324,000. They incurred selling expenses of $30,000. How much gain must they recognize if they sell the residence for $904,000?

Accepted Answer

The gain on the sale is calculated by subtracting the adjusted basis and selling expenses from the sale price: $904,000 - $324,000 - $30,000 = $550,000. However, under U.S. tax law, married couples filing jointly can exclude up to $500,000 of gain on the sale of their principal residence if they meet certain conditions, which they do in this case. Therefore, they must recognize $50,000 of gain ($550,000 - $500,000 exclusion).

Question 4

Wally (who is in the 24 percent tax bracket) has a $5,000 short-term capital loss on some bonds, a $6,000 long-term capital loss on collectibles, a $15,000 Section 1202 gain, and a net $4,000 long-term capital gain from an investment. What is amount and type of gain(s) and tax rate(s) applied?

Accepted Answer

Wally's $5,000 short-term capital loss and $6,000 long-term capital loss can be combined for a total loss of $11,000. This total loss can offset the $15,000 Section 1202 gain (which is taxed at a 28% rate for collectibles) and the $4,000 long-term capital gain (which is taxed at a 15% rate for his tax bracket). After offsetting the gains with the losses, Wally is left with a $4,000 gain taxed at 28% (from the Section 1202 gain on collectibles) and a $4,000 long-term capital gain taxed at 15%.

Question 5

Margo purchased 2,000 shares of qualifying Section 1202 stock six years ago for $200,000. In the current year, she sold the stock for $2,000,000. How much gain can she exclude from her income?

Accepted Answer

According to Section 1202, Margo can exclude the greater of $10 million or ten times her basis in the stock from her income. In this case, ten times her basis is $2,000,000. Therefore, she can exclude the greater of $10 million or $2,000,000, which is $2,000,000. However, since her basis in the stock was $200,000, she must recognize a gain of $1,800,000 ($2,000,000 - $200,000) and can exclude $900,000 from her income (50% of the gain). Therefore, the correct answer is C.

Question 6

Justin, who is single, sells his principal residence that he has owned and occupied for the past five years. His adjusted basis for the residence is $90,000. He incurred selling expenses of $10,000. How much gain must Justin recognize if sells the residence for $390,000?

Accepted Answer

The answer of Justin, who is single, sells his principal...

Question 7

Tina is single and one of the founding shareholders of Exacta Corporation. She acquired her Exacta Section 1244 stock four years ago for $123,000. During the current year, Tina sold all of her Exacta stock to an unrelated party for $40,000. Tina had no other capital gains or losses during the year. What is the maximum amount of loss Tina can deduct in the current year for the Exacta stock?

Accepted Answer

The answer of Tina is single and one of the...

Question 8

Which of the following is not a requirement for the stock of a corporation to be considered Section 1244 stock?

Accepted Answer

Voting stock is not a requirement for stock to be considered Section 1244 stock. The other three requirements are necessary: the corporation must qualify as a small business corporation, the corporation must be a domestic corporation, and the stock must be issued for money or property.

Question 9

Sophia, a single taxpayer, is one of the founding shareholders of Davis Corporation. She acquired her Davis Corporation Section 1244 stock four years ago for $163,000. During the current year, Sophia sold all of her Davis stock to an unrelated party for $40,000. There were no other capital gains or losses reported on her tax return for the year. What is the maximum amount of loss that can be deducted on Sophia's current year tax return for the Davis stock?

Accepted Answer

Section 1244 of the Internal Revenue Code permits individuals to deduct as an ordinary loss up to $50,000 ($100,000 if filing a joint return) of the loss from the sale or exchange of qualified small business corporation (QSBC) stock in any one year. However, the loss may not exceed the taxpayer's adjusted basis in the QSBC stock. In this case, Sophia's maximum loss deduction is limited to her adjusted basis of $163,000, which is reduced by the $40,000 sales price, resulting in a maximum loss deduction of $123,000. Therefore, the correct answer is C.

Question 10

Liam used his auto 70 percent for business and 30 percent for personal use. He purchased it for $15,000 and has taken $5,460 of depreciation on it. What is his recognized gain on a sale for $12,000 and what is its character?

Accepted Answer

CThe recognized gain on the sale is calculated by subtracting the adjusted basis from the sale price. The adjusted basis is the original cost minus depreciation taken. Here, the adjusted basis is $15,000 - $5,460 = $9,540. The sale price is $12,000, so the recognized gain is $12,000 - $9,540 = $2,460. However, because the car was used for business, the depreciation recapture rules apply. The entire gain of $2,460 is treated as ordinary income under Section 1245 because it is less than the depreciation taken ($5,460). Therefore, the correct answers are B) $3,360 Section 1245 ordinary income, which is a mistake in calculation in the options provided, and C) $5,460 Section 1245 ordinary income, which correctly identifies the nature of the gain but does not match the calculated gain. The correct calculation should reflect the gain as ordinary income due to depreciation recapture rules, but the exact amount of recognized gain ($2,460) is not listed among the options. The character of the gain is correctly identified as Section 1245 ordinary income due to the depreciation recapture, but the provided options do not accurately reflect the calculated gain.

Question 11

Which of the following statements concerning the exclusion available under Section 121 for the sale of a personal residence is correct?

Accepted Answer

Section 121 allows taxpayers to exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain on the sale of their personal residence if they have owned and used the property as their primary residence for at least two out of the five years preceding the sale. Taxpayers can qualify for this exclusion every two years if they meet the ownership and use tests again. Option A is incorrect because the exclusion is not a fixed percentage but rather a dollar amount based on the gain realized on the sale. Option B is incorrect because the property must be the taxpayer's primary residence to qualify for the exclusion. Option D is incorrect because the gain cannot be deferred or rolled over; it must be recognized in the year of the sale unless the taxpayer reinvests the proceeds into another qualifying property within a specific time period under Section 1031.

Question 12

Ian and Mia married in early 2018 and purchased a new home together. Each owned and lived in separate residences prior to the marriage. Ian purchased his residence 5 years ago for $190,000 and he added a master bedroom and bathroom addition at a cost of $40,000. Mia purchased her home three years ago for $135,000. In late 2018, Ian sold his residence for $510,000 and paid a sales commission of $8,000. After paying off his $80,000 mortgage balance, he received the remaining cash proceeds of $422,000. In late 2018 Mia sold her residence for $190,000 and paid a sales commission of $2,000. She had paid off her mortgage so she received $188,000 cash from the sale. If Ian and Mia file a joint tax return for 2018, how much gain do they recognize on their 2018 joint tax return from the sales of their previous homes?

Accepted Answer

Ian's gain is $242,000 ($510,000 - $190,000 - $40,000 - $80,000). Mia's gain is $55,000 ($190,000 - $135,000). Their total gain is $297,000 ($242,000 + $55,000). However, they are allowed to exclude up to $250,000 of gain on the sale of their principal residence. Therefore, their recognized gain is $47,000 ($297,000 - $250,000).

Question 13

Abby has a $10,000 loss on some collectibles, a $5,000 Sec. 1202 gain, and an $11,000 gain on some securities. If all gains and losses are long-term and Abby is in the 24 percent tax bracket, how is her net gain taxed?

Accepted Answer

The answer of Abby has a $10,000 loss on some...

Question 14

William purchased his personal residence in 2011 for $285,000. In early 2017, he lost his job and was unable to make payments on the mortgage. In December 2017, William worked out a new repayment schedule with his bank after he obtained a new job that reduced his mortgage from $235,000 to $120,000. Which of the following statements is true regarding this mortgage reduction?

Accepted Answer

The answer of William purchased his personal residence in 2011...

Question 15

Shawn, a single taxpayer, sold the house he lived in for seven years for $700,000. He purchased the house for $285,000. He made improvements at a cost of $125,000 and paid a $30,000 commission on the sale. What are Shawn's realized and recognized gains on the sale?

Accepted Answer

The answer of Shawn, a single taxpayer, sold the house...

Question 16

Bennett, who is single, owns all of the outstanding stock of Bennett Company. In 2018 Bennett sells all of his stock in the company for $30,000. If the stock qualifies as Section 1244 and his basis in the stock is $140,000, how is his loss on the sale classified for tax purposes?

Accepted Answer

The answer of Bennett, who is single, owns all of...

Quiz 8: Property Dispositions