Question 1

Costs of tangible personal business property which are expensed under Sec.179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

Accepted Answer

Tangible personal business property expensed under Sec. 179 must be used for business purposes for the entire MACRS recovery period. If it is converted to nonbusiness use, a portion of the depreciation deductions taken under Sec. 179 must be recaptured and included in taxable income.

Question 2

Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

Accepted Answer

Gain recognized on the sale or exchange of property between related parties is generally treated as ordinary income if the property is subject to depreciation in the hands of the transferee, as per the Internal Revenue Code Section 1239.

Question 3

Installment sales of depreciable property which result in recaptured income under Secs.1245 or 1250 require that the recaptured income be recognized in the year of sale.

Accepted Answer

Recaptured income from installment sales of depreciable property under Secs.1245 or 1250 must be recognized in the year of sale. This is required by the tax code.

Question 4

Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec.179.Depreciation of $3,500 would have been taken under the MACRS rules.If Douglas converts the furniture to nonbusiness use today,Douglas must
A)amend the prior two years tax returns.
B)include $3,500 in gross income in year of conversion.
C)include $21,500 in gross income in year of conversion.
D)include $25,000 in gross income in year of conversion.

Accepted Answer

When Douglas elected to expense all of the office furniture under Sec. 179, he gave up his right to claim any depreciation deductions for the furniture in the future. Therefore, he cannot use the MACRS rules to claim $3,500 in depreciation now that he is converting the furniture to nonbusiness use. According to IRS guidelines, when property is converted from business use to personal use, any depreciation previously claimed under Sec. 179 must be added back as income in the year of conversion. Since Douglas expensed the full cost of the furniture ($25,000), he must include that entire amount in his gross income in the year of conversion, resulting in answer choice C. He does not need to amend any prior tax returns.

Question 5

A taxpayer purchased a factory building in 1985 for $800,000.After claiming ACRS-accelerated depreciation of $800,000,she sells the asset for $1,000,000 during the current year.No payment is received during the current year,and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale.The installment sales method is adopted.How much ordinary income is recognized in the current year?
A)$0
B)$200,000
C)$800,000
D)$1,000,000

Accepted Answer

The amount of ordinary income recognized in the current year under the installment sales method is determined by multiplying the gross profit percentage by the interest portion of each payment received during the year. The gross profit percentage is equal to the gain on the sale divided by the total contract price ($1,000,000/$1,000,000 = 100%). The interest portion of each payment received during the year is calculated using the applicable federal rate (AFR). Assuming an AFR of 3%, the interest portion of each payment is 25% of the payment ($250,000 x 3% = $7,500, and $7,500/$30,000 = 25%). Therefore, the amount of ordinary income recognized in the current year is 25% of the gross profit, or $200,000 ($1,000,000 x 100% x 25%).

Question 6

Maura makes a gift of a van to a local food bank run by a charity.Maura had used the van in her trade or business.The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed.What is the amount of Maura's charitable contribution deduction?
A)$6,500
B)$31,000
C)$4,000
D)$2,500

Accepted Answer

The charitable contribution deduction for property used in a trade or business is limited to the lesser of the fair market value or the property's adjusted basis (cost minus depreciation). The adjusted basis is $31,000 - $27,000 = $4,000. Since $4,000 is less than the FMV of $6,500, the deduction is $4,000.

Question 7

When gain is recognized on an involuntary conversion,gain is subject to recapture under Sec.1245 or Sec.1250.

Accepted Answer

When gain is recognized on an involuntary conversion, it is subject to recapture under Sec.1245 or Sec.1250. This means that if the property being replaced was used for certain purposes, such as business or rental, and the replacement property does not meet those same qualifications, the gain recognized may be recaptured and taxed at a higher rate.

Question 8

Heather purchased undeveloped land to drill for oil and gas.She spent $800,000 on intangible drilling costs during the year of purchase,which she elected to immediately deduct.During the three years of the well's operation,Heather deducted $1.2 million of cost depletion.Heather has sold the property for a $3 million gain.The gain will be treated as
A)$3 million Sec.1231 gain.
B)$3 million ordinary gain.
C)$2 million ordinary income and $1 million Sec.1231 gain.
D)$1.2 million ordinary income and $1.8 million Sec.1231 gain.

Accepted Answer

The $800,000 that Heather spent on intangible drilling costs can be immediately deducted in the year of purchase per IRC Section 263(c)(1).

During the three years of well operation, Heather claimed $1.2 million of cost depletion, which is a type of depreciation on natural resources like oil and gas. This depletion is deducted against base in the property determined by the depletion unit.

When Heather sells the property, she will recognize a $3 million gain. This gain will be split into two components: ordinary income (from the recapture of previously deducted depreciation) and capital gain (from the sale of a capital asset).

Since Heather claimed $1.2 million of cost depletion, she must recapture that amount as ordinary income (IRC Section 1254). Therefore, Heather will have $1.2 million of ordinary income and $1.8 million of capital gain.

The $1.8 million capital gain will be treated as a Sec. 1231 gain (assuming Heather held the property for more than one year). Therefore, the answer is C.

Question 9

An individual taxpayer sells a business building placed in service five years ago and recognizes a gain.This is the taxpayer's first and only sale of Sec.1231 property.Since the gain will be treated as LTCG,the details of the sale should be reported on Schedule D of Form 1040.

Accepted Answer

The gain from the sale of Sec. 1231 property is reported on Form 4797, not Schedule D. If it qualifies as a long-term capital gain after netting, it is then transferred to Schedule D.

Question 10

Echo Corporation plans to sell a small building to Nate,its 65% shareholder.The building was placed in service five years ago.An independent appraisal will be obtained to set the selling price at an appropriate market price,and a $50,000 gain is expected to result.The only asset previously sold by Echo was a stock investment five years ago which resulted in a $40,000 loss.If the sale of the building closes before year-end,the gain on the building will allow recognition of the capital loss carryover before it expires.

Accepted Answer

The gain from the sale of the building is likely to be considered ordinary income, not a capital gain, because it is a sale of business property, not a capital asset. Therefore, it cannot offset the capital loss carryover.

Question 11

Clarise bought a building three years ago for $180,000 to use in her business.The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed.During the current year,Clarise sells the building to her wholly owned corporation for $235,000.The tax results to Clarise are
A)$70,000 ordinary income.
B)$70,000 of Sec.1231 gain.
C)$55,000 ordinary income and $15,000 Sec.1231 gain.
D)$15,000 of ordinary income and $55,000 Sec.1231 gain.

Accepted Answer

The answer of Clarise bought a building three years ago...

Question 12

Cobra Inc.sold stock for a $25,000 loss five years ago.It has been carrying over the capital loss for five years,and the loss will expire at the end of this year because Cobra has not had any capital gains.Earlier this year Cobra sold a parcel of land held four years for business use and will recognize a $30,000 gain.Cobra is thinking about selling some machinery used in its business for the past three years.During this time technology has dramatically changed so Cobra will recognize a $32,000 loss on the sale of the machinery.Cobra is trying to decide whether to sell the machinery at year-end or early next year.Cobra is profitable and has a consistent marginal tax rate of 21%.When should Cobra sell the equipment?
A)current year
B)early next year
C)current year,but arrange an installment sale to spread the loss recognition over the two years
D)either the current year or next year

Accepted Answer

The answer of Cobra Inc.sold stock for a $25,000 loss...

Question 13

If no gain is recognized in a nontaxable like-kind exchange involving Sec.1245 or Sec.1250 property,the recapture potential carries over to the replacement property.

Accepted Answer

If no gain is recognized in a nontaxable like-kind exchange involving Sec.1245 or Sec.1250 property, the recapture potential carries over to the replacement property. This means that the basis in the replacement property will be reduced by any recapture potential that was not recognized in the exchange. Any future sale of the replacement property could trigger the recognition of the deferred recapture potential.

Question 14

All of the following are considered related parties for purposes of Sec.1239 recapture with the exception of
A)an individual and a partnership where the individual has a one-fourth interest in the partnership.
B)an individual and a corporation where the individual owns more than 50% of the value of the outstanding stock of the corporation.
C)an individual and a corporation where the individual's spouse owns more than 50% of the value of the outstanding stock of the corporation.
D)an individual and a partnership where the individual owns more than 50% of the capital of the partnership.

Accepted Answer

An individual with only a one-fourth interest in a partnership is not considered a related party under Sec. 1239, which typically requires more than 50% ownership or control.

Question 15

Four years ago,Otto purchased farmland for $600,000 and spent an additional $40,000 on soil and water conservation which was deducted in the year of purchase.Otto has just sold the land for $900,000.How much of the $300,000 gain will be treated as ordinary income?
A)$0
B)$24,000
C)$40,000
D)$300,000

Accepted Answer

The gain on the sale of the farmland is $300,000 ($900,000 selling price - $640,000 adjusted basis). Of this gain, $40,000 must be treated as ordinary income due to the deduction taken for soil and water conservation. Therefore, only choice C is correct.

Quiz 29: Property Transactions: Sec1231 and Recapture

Costs of tangible personal business property which are expensed under Sec.179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

Installment sales of depreciable property which result in recaptured income under Secs.1245 or 1250 require that the recaptured income be recognized in the year of sale.

Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec.179.Depreciation of $3,500 would have been taken under the MACRS rules.If Douglas converts the furniture to nonbusiness use today,Douglas must

Maura makes a gift of a van to a local food bank run by a charity.Maura had used the van in her trade or business.The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed.What is the amount of Maura's charitable contribution deduction?

When gain is recognized on an involuntary conversion,gain is subject to recapture under Sec.1245 or Sec.1250.

An individual taxpayer sells a business building placed in service five years ago and recognizes a gain.This is the taxpayer's first and only sale of Sec.1231 property.Since the gain will be treated as LTCG,the details of the sale should be reported on Schedule D of Form 1040.

If no gain is recognized in a nontaxable like-kind exchange involving Sec.1245 or Sec.1250 property,the recapture potential carries over to the replacement property.

All of the following are considered related parties for purposes of Sec.1239 recapture with the exception of

Four years ago,Otto purchased farmland for $600,000 and spent an additional $40,000 on soil and water conservation which was deducted in the year of purchase.Otto has just sold the land for $900,000.How much of the $300,000 gain will be treated as ordinary income?