Question 1

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?

Accepted Answer

The answer of Kevin owns a rental apartment building that...

Question 2

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?

Accepted Answer

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

Question 3

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:

Accepted Answer

Net Section 1231 gains or losses are treated as long-term capital gains or losses to the extent that they do not exceed any current-year net Section 1231 losses. Any excess is treated as ordinary income. Since the current year's net Section 1231 gain ($14,000) exceeds the previous year's net Section 1231 loss ($7,000), only $7,000 is treated as long-term capital gain, and the remaining $7,000 is treated as ordinary income. Thus, the correct answer is C.

Question 4

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?

Accepted Answer

- For the sale of each machine: 
  - Selling price: $14,000 
  - Adjusted basis: $11,000 
  - Therefore, there is a $3,000 gain on each machine 
  - This gain is considered Section 1245 recapture because it is ordinary income recaptured up to the amount of depreciation previously allowed 
  - Total Section 1245 recapture: $6,000

- For the sale of the warehouse: 
  - Selling price: $95,000 
  - Adjusted basis: $60,000 
  - Therefore, there is a $35,000 gain on the sale of the warehouse 
  - This gain is considered Section 1231 gain because it is a long-term capital gain on the sale of a depreciable asset used in the taxpayer's trade or business

- Because the total amount of Section 1245 recapture and Section 291 recapture (none in this case) exceeds the Section 1231 gain, all of the gain will be taxed as ordinary income (Section 1245 recapture) and long-term capital gain (Section 1231 gain) 
- Therefore, the total recognized gain is: 
  - $6,000 Section 1245 recapture 
  - $28,000 Section 1231 gain

Question 5

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?

Accepted Answer

Since the equipment was depreciated using an accelerated method, it is classified as Section 1245 property. The gain recognized on the sale is the difference between the selling price ($43,000) and the adjusted basis ($21,000), which is $22,000. Therefore, it is a Section 1245 gain.

Question 6

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?

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 7

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:

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 8

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:

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 9

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?

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 10

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?

Accepted Answer

The amount of gain realized is calculated as follows:
Sales price: 
Cash received: $80,000
Note received: $100,000
Assumption of existing note: $150,000
Total sales price: $330,000

Less the adjusted basis:
Original cost: $300,000
Less accumulated depreciation: ($187,500)
Adjusted basis: $112,500

Gain realized: $330,000 - $112,500 = $217,500

Of the $217,500 realized gain, $87,500 ($187,500 - $50,000) is attributable to depreciation recapture and is taxed at a maximum rate of 25%. The remaining $130,000 ($217,500 - $87,500) of the gain is a long-term capital gain and is taxed at a maximum rate of 20%.

Therefore, 86.2% of Lopez Corporation's realized gain on the sale will be taxed as ordinary income due to depreciation recapture.

Question 11

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?

Accepted Answer

Melody used the computer for business purposes, and the adjusted basis is less than the sale price. Therefore, she will recognize a gain on the sale. The gain must be divided into two different types for tax purposes: the portion of the gain attributed to depreciation is treated as ordinary income and may be subject to recapture under Section 1245, while the remaining gain is treated as a capital gain or Section 1231 gain.

First, we need to determine the portion of the gain subject to depreciation recapture. Melody used the computer 80% of the time for business purposes (100% - 20% for personal use), so 80% of the adjusted basis ($1,000) is $800. The amount realized on the sale ($1,200) minus the adjusted basis ($1,000) equals $200, which is the portion of the gain not subject to depreciation recapture.

The remaining gain is the portion subject to depreciation recapture. The lesser of the selling price ($1,200) and the adjusted basis ($1,000) is treated as ordinary income and is subject to recapture as depreciation under Section 1245. Therefore, the gain subject to Section 1245 recapture is $200. However, this amount is not the total gain recognized because the other $200 mentioned earlier is not subject to recapture. So the total gain recognized is $200 + $200 = $400.

Therefore, the correct answer is D.

Question 12

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?

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 13

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?

Accepted Answer

The answer of Carol used her auto 60 percent for...

Question 14

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?

Accepted Answer

- Office furniture: Section 1231 loss of $2,400 (since the cost of the asset was more than $3,000 and it was held for over one year)
- Truck: Section 1245 recapture of $3,100 (since it was used for business purposes and sold for a gain) and Section 1231 gain of $700 (since the cost of the asset was more than $3,000 and it was held for over one year)
- Bakery equipment: Ordinary loss of $4,500 (since it was held for less than one year)

Question 15

Which of the following comparisons is correct?

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

Which of the following is correct?

Accepted Answer

The Section 1231 lookback rule converts potential long-term capital gain into ordinary income. This occurs when a taxpayer has a net gain from the sale of 1231 property (property used in a trade or business or held for investment) but has had net losses in prior years. The prior losses are used to offset the current gain, but any remaining gain is converted to ordinary income.

Question 17

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?

Accepted Answer

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

Question 18

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?

Accepted Answer

The partnership's adjusted basis in the building is $280,000 minus $80,000 of depreciation deductions, or $200,000. The amount realized on the sale is $300,000, resulting in a gain of $100,000 ($300,000 minus $200,000). Since the building has been held for more than one year, the gain is a long-term capital gain.

Under the tax code, some types of long-term gains are treated differently than others. Section 1231 applies to gains from the sale of depreciable property used in a business, and Section 1250 specifically applies to real estate depreciation.

So, the partnership would have a $80,000 unrecaptured Section 1250 gain (the amount of depreciation taken on real estate) and a $20,000 Section 1231 gain (the amount of gain in excess of the unrecaptured Section 1250 amount). Therefore, the answer is C.

Question 19

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?

Accepted Answer

The adjusted basis of the machine is $50,000, which is less than the selling price of $80,000. Therefore, there is a realized gain of $30,000 (sale price - adjusted basis).
However, since the machine is considered to be section 1245 property (i.e. depreciable personal property), there needs to be a recapture of any depreciation claimed in excess of straight-line depreciation. In this case, assuming the straight-line depreciation was $18,000 (based on the difference between the initial cost of $68,000 and the adjusted basis of $50,000 over three years), there would be a section 1245 recapture of $18,000. This is because the actual depreciation claimed would have been more than $18,000 due to any accelerated depreciation methods used.
Therefore, the total tax consequences are a section 1245 recapture of $18,000 and a section 1231 gain of $12,000 ($30,000 gain - $18,000 recapture).

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?

Accepted Answer

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

Quiz 8: Property Dispositions