Question 1

Sec. 1245 can increase the amount of gain recognized on an asset.

Accepted Answer

False

Question 2

Section 1250 could convert a portion of Sec. 1231 gain into ordinary income if the real property was placed in service prior to 1987 and accelerated depreciation was used.

Accepted Answer

Section 1250 of the Internal Revenue Code applies to real property that was placed in service prior to 1987 and where accelerated depreciation was used. It requires that a portion of the gain be treated as ordinary income rather than capital gain.

Question 3

If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e. a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.

Accepted Answer

This is because the net loss from the casualty or theft means that there are no overall gains to be recognized, so the entire amount is treated as a loss. This loss is then treated as an ordinary loss for tax purposes.

Question 4

If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.

Accepted Answer

This is the correct order of application for recapture of gains on Sec. 1231 assets.

Question 5

In 2014, Thomas, who has a marginal tax rate of 15%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.

Accepted Answer

Sec. 1231 property is taxed at lower capital gain rates if held for more than one year. Since Thomas has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, he will be able to apply the lower capital gain rates to the $4,000 gain and will not owe any tax on it, given his marginal tax rate of 15%.

Question 6

The sale of inventory results in ordinary gain or loss.

Accepted Answer

The sale of inventory is considered a normal course of business activity and therefore results in ordinary gain or loss. It is not classified as a capital asset.

Question 7

Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

Accepted Answer

Sec. 1245 specifically applies to depreciable personal property, not real property.

Question 8

Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Accepted Answer

Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Question 9

Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.

Accepted Answer

Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as Sec. 1231 gains and losses, not ordinary gains and losses. Ordinary gains and losses are those from the sale of inventory or assets held for less than one year, as well as other non-business income and expenses.

Question 10

For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

Accepted Answer

Depreciation recapture is not required on real property for noncorporate taxpayers if it was placed in service after 1986. However, corporate taxpayers are still subject to depreciation recapture rules.

Question 11

If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment's holding period is more than one year.

Accepted Answer

This statement is true. If the realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain may receive Sec. 1231 treatment if the equipment's holding period is more than one year. This portion of the gain will be taxed at the more favorable long-term capital gains rate.

Question 12

Depreciable property used in a trade or business for one year or less is considered Sec. 1231 property.

Accepted Answer

The answer of Depreciable property used in a trade or...

Question 13

When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

Accepted Answer

Depreciation recapture for real property placed in service after 1986 is taxed at a maximum rate of 25% for noncorporate taxpayers but at a maximum rate of 35% for corporate taxpayers.

Question 14

Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

Accepted Answer

Sec. 1245 applies to any property that has been depreciated under MACRS, regardless of when it was placed in service. Therefore, it can apply to buildings placed in service prior to 1987 if they have undergone depreciation under MACRS.

Question 15

Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

Accepted Answer

Unrecaptured 1250 gain refers to the portion of long-term capital gain from the sale of depreciable real estate that would be taxed at ordinary income rates if all depreciation, not just additional depreciation, was recaptured. This is because Sec. 1250 only recaptures the additional depreciation taken on the property, leaving a portion of the gain as unrecaptured.

Question 16

Sec. 1231 property must satisfy a holding period of more than one year.

Accepted Answer

Sec. 1231 property refers to certain types of assets, such as real estate and depreciable property, that are held for more than one year and used in a trade or business. Therefore, they must satisfy a holding period of more than one year to qualify for treatment under Sec. 1231 of the Internal Revenue Code.

Question 17

A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.

Accepted Answer

Net Sec. 1231 gains are first netted with any Sec. 1231 losses from the same year. The resulting net amount is then treated as either ordinary income or capital gain, depending on which amount is greater. However, if there were any unrecaptured Sec. 1231 losses from the preceding five years, the net Sec. 1231 gain is treated as ordinary income to the extent of those losses.

Question 18

Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.

Accepted Answer

The answer of Gains and losses from involuntary conversions of...

Question 19

The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

Accepted Answer

The statement accurately describes the purpose of Section 1245. It is designed to prevent taxpayers from benefitting from both depreciation deductions and favorable treatment of certain asset sales under Section 1231. Instead, Section 1245 requires that certain assets, known as "Section 1245 property," be treated as ordinary income when sold or otherwise disposed of, thus limiting the tax benefits of depreciation deductions for those assets.

Question 20

Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses. He must report a capital loss of $2,000 on his tax return.

Accepted Answer

Section 1231 gains and losses are netted, meaning that if Mark has more gains than losses, he will report a net Section 1231 gain, which is taxed as a capital gain. If Mark has more losses than gains, he will report a net Section 1231 loss, which is deducted as an ordinary loss. In this case, since Mark has more losses than gains, he will not report a capital loss on his tax return.

Quiz 13: Property Transactions: Section 1231 and Recapture

Sec. 1245 can increase the amount of gain recognized on an asset.

Section 1250 could convert a portion of Sec. 1231 gain into ordinary income if the real property was placed in service prior to 1987 and accelerated depreciation was used.

If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e. a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.

If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.

In 2014, Thomas, who has a marginal tax rate of 15%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.

The sale of inventory results in ordinary gain or loss.

Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.

For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment's holding period is more than one year.

Depreciable property used in a trade or business for one year or less is considered Sec. 1231 property.

When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

Sec. 1231 property must satisfy a holding period of more than one year.

A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.

Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.

The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses. He must report a capital loss of $2,000 on his tax return.