Question 1

Which of the following sections does not recapture or recharacterize a taxpayer's gain?

Accepted Answer

Sections §1239, §1250, §1245, and §291 all involve specific rules for recapturing or recharacterizing a taxpayer's gain under certain conditions, indicating that none of the choices provided are sections that do not recapture or recharacterize a taxpayer's gain.

Question 2

Leesburg sold a machine for $2,200 on November 10^th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg's gain or loss realized on the machine?

Accepted Answer

The answer of Leesburg sold a machine for $2,200 on...

Question 3

Which of the following is true regarding depreciation recapture?

Accepted Answer

Depreciation recapture applies when a gain is realized on the sale of a depreciable asset. It changes the character of the gain from capital to ordinary, resulting in a higher tax rate.

Question 4

Which of the following gains does not result solely in an ordinary gain or loss?

Accepted Answer

The sale of equipment where the gain realized exceeds the accumulated depreciation does not result solely in an ordinary gain or loss because the portion of the gain exceeding the accumulated depreciation is treated as a Section 1231 gain, which can be taxed as a long-term capital gain if certain conditions are met.

Question 5

Which of the following results in an ordinary gain or loss?

Accepted Answer

The sale of inventory results in an ordinary gain or loss, as it is considered a normal part of a business's operations. The other options may result in capital gains or losses or §1231 gains or losses, which are taxed differently.

Question 6

Which of the following sections recaptures or recharacterizes only corporate taxpayers' gains?

Accepted Answer

Section 291 specifically deals with the recapture of depreciation for corporate taxpayers, recharacterizing certain gains as ordinary income rather than capital gains.

Question 7

Which of the following does not ultimately result in a capital gain or loss?

Accepted Answer

The sale of inventory is considered part of ordinary business operations and results in ordinary income or loss, not a capital gain or loss. Capital gains or losses are typically realized from the sale of capital assets, not inventory.

Question 8

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

Accepted Answer

The answer of Butte sold a machine to a machine...

Question 9

Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman's gain or loss?

Accepted Answer

The answer of Bozeman sold equipment that it uses in...

Question 10

The sale of land held for investment results in which of the following types of gain or loss?

Accepted Answer

The sale of land held for investment results in a capital gain or loss.

Question 11

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building 10 years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

Accepted Answer

The first step is to calculate the adjusted basis of the property:

Purchase price: $600,000 
Accumulated depreciation: $200,000 
Adjusted basis: $400,000

The selling price of $800,000 exceeds the adjusted basis of $400,000, resulting in a gain of $400,000.

However, because the property was used in Bateman Corporation's business, it is considered section 1231 property. Any gain from the sale of section 1231 property is characterized as either ordinary income or §1231 gain.

The portion of the gain equal to the accumulated depreciation ($200,000) is recaptured as ordinary income. The remaining gain of $200,000 is §1231 gain.

Therefore, the total gain of $400,000 is split into two parts: $200,000 ordinary income and $200,000 §1231 gain. The correct answer is A.

Question 12

Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain?

Accepted Answer

The gain is $9,500 ($52,000 - $42,500). Since the land was held for more than one year and was used in a trade or business, the gain is classified as §1231 gain.

Question 13

The sale of computer equipment used in a trade or business for nine months results in which of the following types of gain or loss?

Accepted Answer

The answer of The sale of computer equipment used in...

Question 14

The sale for more than the original cost basis (before depreciation) of machinery used in a trade or business and held for more than one year results in which of the following types of gain or loss?

Accepted Answer

The sale of machinery used in a trade or business, held for more than one year, and sold for more than its original cost basis results in §1245 recapture (to the extent of depreciation taken or allowable) which is treated as ordinary income, and any gain in excess of the recaptured amount is treated as §1231 gain, which can be capital if the §1231 gains exceed the §1231 losses for the year.

Question 15

Which of the following is not a §1245 asset if held for more than one year?

Accepted Answer

Land is not a §1245 asset regardless of how long it is held. Only tangible personal property (such as machinery and automobiles) and certain intangible assets (such as patents and copyrights) are considered §1245 assets. Business cell phones would also be considered a §1245 asset if used for business purposes.

Question 16

Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

Accepted Answer

To calculate Brad's gain or loss, we need to first determine his adjusted basis in the rental house:
Purchase price: $225,000
Depreciation claimed: $50,000
Adjusted basis: $175,000 ($225,000 - $50,000)

Next, we can calculate Brad's gain on the sale:
Sale price: $250,000
Adjusted basis: $175,000
Gain before recapture: $75,000

Because Brad held the rental house for more than one year, his gain is a long-term capital gain. However, because he claimed depreciation on the property, a portion of his gain is considered unrecaptured §1250 gain. This is because depreciation reduces his basis in the property, which in turn increases his gain on the sale.

The portion of Brad's gain that is unrecaptured §1250 gain is equal to the lesser of his depreciation claimed or the gain before recapture. In this case, Brad claimed $50,000 in depreciation and his gain before recapture was $75,000, so his unrecaptured §1250 gain is $50,000.

The remaining portion of Brad's gain ($75,000 - $50,000 = $25,000) is classified as §1231 gain, which is also a type of long-term capital gain.

Therefore, the answer is B: $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.

Question 17

What is the character of land used in an active trade or business for two years?

Accepted Answer

Section 1231 of the U.S. Internal Revenue Code classifies property used in a trade or business and held for more than one year as §1231 property. This classification allows for the favorable treatment of gains, where they are taxed at capital gains rates, and losses, which can be deducted as ordinary losses.

Question 18

The sale at a loss of machinery that was used in a trade or business and held for more than one year results in which of the following types of loss?

Accepted Answer

When machinery is sold at a loss and it was used in a trade or business and held for more than one year, the loss is classified as a §1231 loss under the Internal Revenue Code.

Question 19

Sumner sold equipment that it uses in its business for $30,000. Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss?

Accepted Answer

The calculation of gain or loss on the sale of property involves comparing the amount received from the sale to the adjusted basis of the property. The adjusted basis is the original cost of the property minus any depreciation claimed. In this case, Sumner sold the equipment for $30,000, and the adjusted basis of the property is $80,000 - $40,000 = $40,000.

Since Sumner sold the property for less than the adjusted basis, there is a loss on the sale. However, the type of loss depends on the nature of the property sold. In this case, the property is considered to be §1231 property since it is used in a trade or business.

Therefore, the loss is classified as a §1231 loss, which can be used to offset any other gains or losses from the sale of §1231 property during the year.

Question 20

Which of the following transactions results solely in §1245 gain?

Accepted Answer

§1245 gain is recaptured depreciation on personal property such as machinery. When the accumulated depreciation exceeds the gain realized, all of the gain is considered to be §1245 gain. Therefore, the sale of machinery held for more than one year with accumulated depreciation exceeding the gain realized would result solely in §1245 gain.

Quiz 3: Property Dispositions