Question 1

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

$15,000 cost x 70% = $10,500 - $5,460 depreciation = $5,040 adjusted basis for business portion. $12,000 sales price x 70% = $8,400 business portion of sales price - $5,040 adjusted basis = $3,360 gain (all Section 1245 ordinary income). There is also a $1,200 personal nondeductible loss [($12,000 - $15,000) x 30% = $1,200]

Question 2

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

$700,000 - $30,000 - $285,000 - $125,000 = $260,000 gain realized; $250,000 is unrecognized.

Question 3

William purchased his personal residence in 2009 for $285,000. In 2015, he lost his job and was unable to make payments on the mortgage after June, 2015. In 2016, 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 $285,000 original basis must be reduced by the $115,000 debt reduction.

Question 4

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 taxpayers filing a joint return) of gain from the sale of a personal residence if certain requirements are met, including owning and using the home as a primary residence for at least two out of the five years before the sale. Taxpayers can use this exclusion once every two years. Therefore, statement C is correct. Statement A is incorrect because the exclusion is for up to 100% of the gain, not 50%. Statement B is incorrect because a vacation home does not qualify for the exclusion unless it is also used as a primary residence for at least two out of the five years before the sale. Statement D is incorrect because the gain cannot be deferred or rolled over.

Question 5

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 choices are requirements for stock to be considered Section 1244 stock.

Question 6

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 7

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

($390,000 - $10,000 - $90,000 - $250,000 exclusion = $40,000)

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 2017. What is the tax rate applied to this gain?

Accepted Answer

her gain is subject to the zero tax rate.

Question 9

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 25 percent tax bracket, how is her net gain taxed?

Accepted Answer

the $10,000 collectible loss offsets the $5,000 Sec. 1202 gain first and then $5,000 of the investment gain.

Question 10

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

.80 x $2,500 = $2,000 basis for business use; $1,000 original basis - $500 basis for personal use does not change = $500 adjusted basis for business use at date of sale. 80 x $1,200 = $960; $960 - $500 adj. basis for business portion = $460 Sec. 1245 recapture. $260 - $500 loss on personal portion is not deductible.

Question 11

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

($14,000 - $11,000) x 2 = $6,000 Sec. 1245 recapture; $95,000 - $60,000 = $35,000 total gain; .20 x $35,000 = $7,000 Sec. Sec. 291 recapture; $35,000 - $7,000 = $28,000 Sec. 1231 gain

Question 12

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

$40,000 - $163,000 = $123,000 total loss of which $50,000 is Sec. 1244 ordinary loss and $73,000 is capital loss. $50,000 Sec. 1244 loss + $3,000 of capital loss = $53,000 loss deductible this year (the remaining $70,000 capital loss is carried forward).

Question 13

Becky bought a home with her husband, Ken, in 2003 for $125,000. They were divorced in 2012 and Becky became sole owner of the home under the divorce decree. On January 5, 2016, 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, 2017 for $500,000, how much taxable gain must they report on their 2017 joint tax return?

Accepted Answer

($500,000 - $125,000 - $250,000 exclusion = $125,000). Only Becky qualifies for the exclusion because Michael has not lived in the home for at least two years.

Question 14

Which of the following is correct?

Accepted Answer

The Section 1231 lookback rule converts potential long-term capital gain into ordinary income. This rule applies to certain gains and losses from the sale, exchange, or involuntary conversion of certain business property, such as depreciable real estate or depreciable personal property used in a trade or business. If the net Section 1231 gain for the year is positive, the lookback rule applies, and up to the amount of the net Section 1231 gain can be treated as long-term capital gain. Any remaining gain is then treated as ordinary income.

Question 15

Bennett, who is single, owns all of the outstanding stock of Bennett Company. In 2017 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 16

Ian and Mia married in early 2017 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 2017, 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 2017 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 2017, how much gain do they recognize on their 2017 joint tax return from the sales of their previous homes?

Accepted Answer

$510,000 - $8,000 - ($190,000 + $40,000) = $272,000 realized gain - $250,000 Sec. 121 exclusion = $22,000 recognized gain for Ian. Mia has a $53,000 realized gain but all is excluded because it is less than her $250,000 Sec. 121 exclusion. Mia's unused Section 121 exclusion cannot be used by Ian.

Question 17

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

.60 x $10,800 = $6,480 basis in business portion; $6,480 - $3,992 = $2,488 adj. basis; .60 x $7,800 = $4,680; $4,680 - $2,488 = $2,192 Sec. 1245 recapture. $3,120 - $4,320 = $1,200 nondeductible personal loss.

Question 18

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

($904,000 - $30,000 - $324,000 - $500,000 exclusion = $50,000)

Question 19

Margo purchased 2,000 share 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

.5 x ($2,000,000 - $200,000)

Question 20

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

($50,000 Sec. 1244 loss + $3,000 capital loss)

Quiz 8: Property Dispositions