Question 1

The following table describes the § 1231 assets sold by Tan Company (a sole proprietorship) this year.Compute the gain or loss from each asset disposition and determine the net § 1231 gain treated as long-term capital gain for the year.Assume that there is a § 1231 lookback loss of $14,000. $$\begin{array} { l c c c c c } 
\text { Asset } & \text { Acquired } & \text { Sold } & \text { Cost } & \text { Depreciation } & \text { Sale Price } \
\text { Stamping machine } & 3 / 10 / 15 & 8 / 10 / 19 & \$ 40,000 & \$ 29,736 & \$ 2,000 \
\text { Factory building } & 2 / 12 / 12 & 7 / 23 / 19 & 80,000 & 18,838 & 90,000 \
\text { Tractor } & 5 / 16 / 14 & 11 / 13 / 19 & 52,000 & 52,000 & 60,000 \
\text { Overhead crane } & 11 / 12 / 08 & 2 / 25 / 19 & 74,000 & 74,000 & 18,000
\end{array}$$

Accepted Answer

The answer of The following table describes the § 1231...

Question 2

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:
A)Was depreciated by the transferor.
B)Is depreciable in the hands of the transferee.
C)Is a capital asset.
D)Is real property.
E)None of these.

Accepted Answer

Section 1239 applies when there is a sale of certain property between related taxpayers, and the transferred property is a capital asset, a depreciable asset in the hands of the transferee, and has been depreciated by the transferor. Therefore, choice B is correct because the property must be depreciable in the hands of the transferee for Section 1239 to apply. The other choices do not have any direct connection with Section 1239.

Question 3

Orange Company had machinery completely destroyed by a fire on December 23, 2019.The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200.Orange received $30,000 of insurance proceeds for the machinery and did not replace it.This was Orange's only casualty or theft event for the year.As a result of this event, Orange has:
A)$4,200 ordinary loss.
B)$15,800 § 1245 recapture gain.
C)$14,200 § 1245 recapture gain.
D)$30,000 § 1231 gain.
E)None of these.

Accepted Answer

The correct answer is B) $15,800 § 1245 recapture gain. This is because the insurance proceeds of $30,000 exceed the adjusted basis of the machinery ($14,200), resulting in a gain. Since the machinery is Section 1245 property (tangible personal property), the gain up to the amount of depreciation previously taken is treated as ordinary income under Section 1245 recapture rules. The original cost was $49,000, and the adjusted basis at the time of the casualty was $14,200, indicating that $34,800 of depreciation had been taken. The gain of $15,800 ($30,000 insurance proceeds minus $14,200 adjusted basis) is therefore fully recaptured as ordinary income under Section 1245.

Question 4

Which of the following statements is correct?
A)When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.
B)When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.
C)When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.
D)When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E)All of these are correct.

Accepted Answer

When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished. This is because the basis of inherited property is stepped up to its fair market value at the date of the decedent's death, thereby eliminating any potential for depreciation recapture for the heir.

Question 5

A business machine purchased April 10, 2017, for $98,000 was fully depreciated in 2017 using § 179 immediate expensing.On August 15, 2019, the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?

Accepted Answer

The answer of A business machine purchased April 10, 2017,...

Question 6

Which of the following would extinguish the § 1245 recapture potential?
A)An exchange of depreciable business equipment for like-kind business equipment with gain realized but not recognized.
B)A nontaxable incorporation under § 351.
C)A nontaxable contribution to a partnership under § 721.
D)A nontaxable reorganization.
E)None of these.

Accepted Answer

Section 1245 recapture potential is not extinguished by any of the listed transactions. These transactions generally defer recognition of gain, rather than eliminate it, meaning the § 1245 recapture potential remains until an actual taxable event occurs that does not qualify for deferral or non-recognition treatment.

Question 7

Business equipment is purchased on March 10, 2018, used in the business until September 29, 2018, and sold at a $23,000 loss on October 10, 2018.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2018 Form 4797, Part:
A)I.
B)II.
C)III.
D)IV.
E)This transaction would not be reported in the Form 4797.

Accepted Answer

The loss on disposition of business equipment should be reported in Part II of the Form 4797 as it was held for less than a year (less than 12 months).

Question 8

Assume that a building is subject to § 1250 depreciation recapture because bonus depreciation [§ 168(k)] was used. The building is destroyed in a hurricane, which is the taxpayer's only casualty or theft for the year.In which of the following situations could there be a § 1250 depreciation recapture gain?
A)There is a loss because the insurance recovery is less than the adjusted basis.
B)There is a gain because the insurance recovery exceeds the adjusted basis.
C)Because of the length of time the building has been held, there is no remaining additional depreciation.
D)There is no insurance recovery and the adjusted basis of the building is greater than zero.
E)None of these.

Accepted Answer

If the insurance recovery exceeds the adjusted basis, there would be a gain and therefore a § 1250 depreciation recapture gain. If there is a loss due to insurance recovery being less than the adjusted basis, there would be no gain or loss to recapture. The length of time the building has been held and remaining depreciation do not affect the potential for § 1250 depreciation recapture gain. If there is no insurance recovery but the adjusted basis is greater than zero, there would be a loss but no gain to recapture.

Question 9

Which of the following events could result in § 1250 depreciation recapture?
A)Sale at a loss of a depreciable business building held more than one year.
B)Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C)Sale at a loss of a depreciable business building held for nine months.
D)Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E)None of these.

Accepted Answer

The answer of Which of the following events could result...

Question 10

An individual has a $40,000 § 1245 gain, a $35,000 § 1231 gain, a $33,000 § 1231 loss, a $3,000 § 1231 lookback loss, and a $15,000 long-term capital gain.The net long-term capital gain is:
A)$30,000.
B)$40,000.
C)$17,000.
D)$15,000.
E)None of these.

Accepted Answer

The answer of An individual has a $40,000 § 1245...

Question 11

A retail building used in the business of a sole proprietor is sold on March 10, 2019, for $342,000.The building was acquired in 2009 for $400,000 and straight-line depreciation of $104,000 had been taken on it.What is the maximum unrecaptured § 1250 gain from the disposition of this building?
A)$400,000
B)$322,000
C)$104,000
D)$26,000
E)None of these.

Accepted Answer

The answer of A retail building used in the business...

Question 12

A business taxpayer sold all the depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $22,000.What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer's adjusted gross income? (Ignore the self- employment tax deduction.) $$\begin{array} { l c c c c } 
\text { Asset } & \text { Purchase Date } & \text { Sale Date } & \text { Depreciation } & \text { Gain (Loss) } \
\text { Machine 1 } & 10 / 10 / 17 & 11 / 11 / 19 & \$ 323,000 & \$ 66,000 \
\text { Machine 2 } & 10 / 02 / 16 & 11 / 11 / 19 & 65,000 & ( 15,000 ) \
\text { Machine 3 } & 09 / 23 / 15 & 11 / 11 / 19 & 183,000 & 23,000 \
\text { Machine 4 } & 09 / 23 / 15 & 11 / 11 / 19 & 28,000 & 34,000
\end{array}$$

Accepted Answer

The answer of A business taxpayer sold all the depreciable...

Question 13

Williams owned an office building (but not the land) that was destroyed by a fire. The building was insured and he has a $156,000 gain because his insurance recovery exceeded his adjusted basis for the building. Williams may replace the building. He had taken $145,000 of depreciation on the building, has no § 1231 lookback loss, has no other § 1231 transactions for the year, and has no Schedule D transactions for the year. What is final nature of his gain for the
year and what tax rate(s) apply to the gain if:

a. 	He does reinvest the insurance proceeds.

b. 	If he does not reinvest the insurance proceeds.

Accepted Answer

The answer of Williams owned an office building (but not...

Question 14

Section 1231 gain that is treated as long-term capital gain carries from the 2018 Form 4797 to the 2018 Form 1040, Schedule D, line .
A)8
B)9
C)10
D)11
E)None of these.

Accepted Answer

The answer of Section 1231 gain that is treated as...

Question 15

Lynne owns depreciable residential rental real estate that has accumulated depreciation of $65,000 (all from straight- line) .If Lynne sold the property, she would have a $53,000 gain.The initial characterization of the gain would be:
A)Section 1245 gain.
B)Section 1231 gain.
C)Section 1250 gain.
D)Section 1239 gain.
E)None of these.

Accepted Answer

Since the property is residential rental real estate, it is considered a section 1250 asset. Any gain resulting from the sale of this type of asset is initially characterized as section 1231 gain. Therefore, choice B is correct. Choice A would only apply if there was a recapture of depreciation under section 1245. Choice C would apply if there was additional depreciation recapture under section 1250, but this is not the initial characterization of the gain. Choice D applies to certain types of property transactions, but residential rental real estate does not fall under this category. Therefore, the best choice is B.

Question 16

A business taxpayer sold all depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses.The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets.The taxpayer had unrecaptured § 1231 lookback loss of $12,000.What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer's adjusted gross income? (Ignore the self- employment tax deduction.) $$\begin{array} { l c c c c } 
\text { Asset } & \text { Purchase Date } & \text { Sale Date } & \text { Depreciation } & \text { Gain (Loss) } \
\text { Machine 1 } & 10 / 10 / 17 & 11 / 11 / 19 & \$ 323,000 & \$ 66,000 \
\text { Machine 2 } & 10 / 02 / 17 & 11 / 11 / 19 & 65,000 & ( 15,000 ) \
\text { Machine 3 } & 09 / 23 / 15 & 11 / 11 / 19 & 183,000 & 23,000 \
\text { Machine 4 } & 09 / 23 / 15 & 11 / 11 / 19 & 28,000 & 64,000
\end{array}$$

Accepted Answer

The answer of A business taxpayer sold all depreciable assets...

Question 17

An individual has the following recognized gains and losses from disposition of § 1231 assets (all were vacant land): $15,000 gain, $10,000 loss, $25,000 gain, and $2,000 loss.The individual has a $5,500 § 1231 lookback loss.The individual also has a $16,000 net short-term capital loss from the disposition of stock.Which of the following statements is correct?
A)The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain.
B)The taxpayer has $12,000 net long-term capital gain.
C)The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss.
D)The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain.
E)None of these.

Accepted Answer

The taxpayer combines the § 1231 gains and losses, resulting in a net § 1231 gain of $28,000 ($15,000 + $25,000 - $10,000 - $2,000). The $5,500 § 1231 lookback loss is treated as ordinary income, leaving $22,500 ($28,000 - $5,500) as net long-term capital gain. The $16,000 net short-term capital loss from stock disposition is separate and does not affect the § 1231 calculation. Therefore, the taxpayer has $5,500 of ordinary gain (due to the lookback loss) and $22,500 of net long-term capital gain, which is not an option, indicating a potential misunderstanding or error in the question's choices or interpretation.

Question 18

Residential real estate was purchased in 2016 for $345,000, held as rental property, and depreciated straight-line.
Assume that the land cost was $45,000 and the building cost was $300,000.Depreciation totaled $34,089.The building and land were sold on June 10, 2019, for $683,000 total.What are the tax status of the property and the nature of the gain from the disposition, and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?

Accepted Answer

The answer of Residential real estate was purchased in 2016...

Question 19

Vanna owned an office building that had been held more than one year when it was sold for $567,000.The real estate had an adjusted basis of $45,000 for the land and $233,000 for the building.Straight-line depreciation of $162,000 had been taken on the building.What are the amount and initial character of the gain or loss from disposition of the real estate? Is any of the gain unrecaptured § 1250 (25%) gain?

Accepted Answer

The answer of Vanna owned an office building that had...

Question 20

An individual taxpayer has the following gains and losses.There is $3,000 of § 1231 lookback losses.What is the net long-term capital gain? $$\begin{array} { l l r } 
\text { Holding Period/Propertv } & \begin{array} { l } 
\text { Character of Gain or } \
\text { Loss }
\end{array} & \text { Amount } \
\text { 5 years/vacant land } & \text { §1231 gain } & \$ 7,000 \
\text { 2 years/business equipment } & \text { §1245 gain } & 3,200 \
\text { 3 years/publicly traded stock } & \text { Long-term capital gain } & 890 \
\text { 8 months/publicly traded stock } & \text { Short-term capital loss } & ( 1,870 )
\end{array}$$

Accepted Answer

The answer of An individual taxpayer has the following gains...

Quiz 17: Property Transactions: Section 1231 and Recapture Provisions

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:

Which of the following statements is correct?

A business machine purchased April 10, 2017, for $98,000 was fully depreciated in 2017 using § 179 immediate expensing.On August 15, 2019, the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?

Which of the following would extinguish the § 1245 recapture potential?

Which of the following events could result in § 1250 depreciation recapture?

An individual has a $40,000 § 1245 gain, a $35,000 § 1231 gain, a $33,000 § 1231 loss, a $3,000 § 1231 lookback loss, and a $15,000 long-term capital gain.The net long-term capital gain is:

A retail building used in the business of a sole proprietor is sold on March 10, 2019, for $342,000.The building was acquired in 2009 for $400,000 and straight-line depreciation of $104,000 had been taken on it.What is the maximum unrecaptured § 1250 gain from the disposition of this building?

Section 1231 gain that is treated as long-term capital gain carries from the 2018 Form 4797 to the 2018 Form 1040, Schedule D, line .

Lynne owns depreciable residential rental real estate that has accumulated depreciation of $65,000 (all from straight- line) .If Lynne sold the property, she would have a $53,000 gain.The initial characterization of the gain would be: