Question 1

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

Tina's maximum allowable loss for the Exacta stock is calculated as follows:

1. Determine Tina's basis in the stock: 
   - Tina's basis is the amount she paid for the stock, which is $123,000.

2. Determine the amount of the loss: 
   - The amount of the loss is the difference between the amount Tina received from the sale ($40,000) and her basis in the stock ($123,000). 
   - Loss = $40,000 - $123,000 = $83,000 (this is a loss).

3. Limitation on the loss deduction: 
   - Since Tina is a single taxpayer, the maximum amount of capital losses she can deduct in a year is $3,000. 
   - However, because the loss is a Section 1244 loss, she can deduct up to $50,000 of the loss as an ordinary loss, not a capital loss. 
   - Therefore, Tina can deduct $50,000 of the $83,000 loss in the current year.

Thus, the correct answer is B.

Question 2

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 if married filing jointly) of gain from the sale of a personal residence if certain requirements are met. One of these requirements is that the taxpayer must have owned and used the home as their principal residence for at least two out of the five years prior to the sale. There is no limitation on the number of times a taxpayer can use this exclusion, as long as they meet the ownership and use requirements for each home sold. Therefore, choice C is the correct statement. Choice A is incorrect because the exclusion amount is $250,000 ($500,000 for joint filers), not 50% of the gain. Choice B is incorrect because a vacation home does not qualify as a personal residence unless the taxpayer meets certain requirements, such as using it as their principal residence for at least two years. Choice D is incorrect because the gain on the sale cannot be deferred or rolled over, but must be reported on the tax return, subject to the exclusion limit.

Question 3

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 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

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...

Question 6

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

The answer of Ian and Mia married in early 2018...

Question 7

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

Sophia can treat the loss from the sale of her Section 1244 stock as an ordinary loss instead of a capital loss. The maximum amount of ordinary loss that can be deducted in one year is $100,000 for a joint return filer and $50,000 for a single filer. Since Sophia is a single taxpayer, her maximum ordinary loss deduction is $50,000. Sophia's adjusted basis in the Davis stock was $163,000, and the amount she received from the sale was $40,000. Therefore, the maximum amount of loss that can be deducted on Sophia's current year tax return for the Davis stock is $123,000 ($163,000 - $40,000), which exceeds the $50,000 maximum. However, the excess loss can be carried forward to future tax years.

Question 8

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 9

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 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

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 12

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 13

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

Margo can exclude the greater of $10 million or 10 times her basis in the stock, which is $2 million. Therefore, she can exclude $2 million from her income, leaving her with a taxable gain of $0.

Question 14

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 15

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 16

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 Section 1244 stock. The requirements for Section 1244 stock are that the corporation must qualify as a small business corporation, be a domestic corporation, and the stock must be issued for money or property.

Quiz 8: Property Dispositions