Question 1

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?
A) Capital.
B) §291.
C) §1231.
D) §1245.
E) None of the choices are correct.

Accepted Answer

Assets used in a trade or business and held for more than one year are §1231 assets. Losses recognized do not require depreciation recapture.

Question 2

Leesburg sold a machine for $2,200 on November 10ᵗʰ 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?
A) $800 gain.
B) $1,000 gain.
C) $1,200 loss.
D) $1,400 loss.
E) None of the choices are correct.

Accepted Answer

The gain realized is the $2,200 amount realized less the $1,400 ($2,600 - $1,200) adjusted basis.

Question 3

Which of the following transactions results solely in §1245 gain?
A) Sale of machinery held for less than one year.
B) Sale of machinery held for more than one year and where the gain realized exceeds the accumulated depreciation.
C) Sale of machinery held for more than one year and where the accumulated depreciation exceeds the gain realized.
D) Sale of land held for more than one year and where the amount realized exceeds the adjusted basis.
E) None of the choices are correct.

Accepted Answer

§1245 gain is the lesser of gain realized or accumulated depreciation.

Question 4

Which of the following gains does not result solely in an ordinary gain or loss?
A) Sale of equipment held for less than a year.
B) Sale of inventory.
C) Sale of equipment where the gain realized exceeds the accumulated depreciation.
D) Sale of equipment where the accumulated depreciation exceeds the gain realized.
E) None of the choices are correct.

Accepted Answer

Depreciation recapture, resulting in ordinary income, is limited to accumulated depreciation.

Question 5

Which of the following results in an ordinary gain or loss?
A) Sale of a machine at a gain.
B) Sale of stock held for investment.
C) Sale of a §1231 asset.
D) Sale of inventory.
E) None of the choices are correct.

Accepted Answer

Inventory is always an ordinary asset. Sale of a §1231 asset can generate either ordinary gain or capital loss.

Question 6

Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains?
A) §291.
B) §1239.
C) §1245.
D) Unrecaptured §1250 gains.
E) None of the choices are correct.

Accepted Answer

For corporate taxpayers only, §291 recaptures 20 percent of the lesser of gain realized or accumulated depreciation on real property.

Question 7

Which of the following does not ultimately result in a capital gain or loss?
A) Sale of a personal use asset.
B) Sale of inventory.
C) Gain on equipment used in a trade or business held for more than one year, if it is the only asset sale during the year.
D) Sale of capital stock in another company.
E) None of the choices are correct.

Accepted Answer

Inventory is always an ordinary asset because it is held in the ordinary course of a trade or business.

Question 8

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten 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?
A) $40,000 ordinary and $360,000 §1231 gain.
B) $200,000 ordinary and $200,000 §1231 gain.
C) $400,000 ordinary gain.
D) $400,000 capital gain.
E) None of the choices are correct.

Accepted Answer

For corporations, §291 recapture is 20 percent of the lesser of depreciation taken or the recognized gain as ordinary income. The remaining gain is §1231.

Question 9

The sale of computer equipment used in a trade or business for 9 months results in the following type of gain or loss?
A) Capital.
B) Ordinary.
C) §1231.
D) §1245.
E) None of the choices are correct.

Accepted Answer

Assets used in a trade or business and held for one year or less are ordinary assets.

Question 10

Which of the following sections does not recapture or recharacterize a taxpayer's gain?
A) §1239.
B) §1250.
C) §1245.
D) §291.
E) None of the choices are correct.

Accepted Answer

All of these sections recaptures or recharacterizes a taxpayer's gain.

Question 11

What is the character of land used in an active trade or business for two years?
A) Capital.
B) Ordinary.
C) §1231.
D) Investment.
E) None of the choices are correct.

Accepted Answer

Land and depreciable assets used in a trade or business for more than one year are §1231 assets.

Question 12

Which of the following is True regarding depreciation recapture?
A) Changes the character of a loss.
B) Changes the character of a gain.
C) Changes the amount of a gain.
D) Only applies to ordinary assets.
E) None of the choices are correct.

Accepted Answer

Depreciation recapture changes the character of the gain from §1231 to ordinary.

Question 13

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?
A) $10,000 §1231 loss.
B) $10,000 §1245 loss.
C) $50,000 ordinary loss.
D) $10,000 capital loss.
E) None of the choices are correct.

Accepted Answer

There is no depreciation recapture when a §1231 asset is sold at a loss.

Question 14

The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss?
A) Capital and Ordinary.
B) Ordinary only.
C) Capital and §1231.
D) §1245 and §1231.
E) None of the choices are correct.

Accepted Answer

Because the sales price exceeds the original basis, §1245 depreciation recapture and §1231 gain will be recognized.

Question 15

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?
A) $25,000 §1231 gain.
B) $20,000 ordinary gain, and $5,000 §1231 gain.
C) $5,000 ordinary gain, and $20,000 §1231 gain.
D) $25,000 capital gain.
E) None of the choices are correct.

Accepted Answer

§1245 recaptures the lesser of depreciation taken ($20,000) or gain ($25,000) as ordinary income. The remaining $5,000 gain would be §1231 gain.

Question 16

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?
A) $9,500 §1221.
B) $9,500 §1231.
C) $9,500 §1245.
D) $9,500 §1250.
E) None of the choices are correct.

Accepted Answer

Land used in a trade or business and held for more than one year is a §1231 asset.

Question 17

Which of the following is not a §1245 asset if held for more than one year?
A) Machinery.
B) Automobile.
C) Business cell phone.
D) Land.
E) None of the choices are correct.

Accepted Answer

Land is not subject to cost recovery and is a §1231 asset, but not a §1245 asset.

Question 18

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?
A) $7,500 §1231 loss.
B) $5,000 §1231 loss.
C) $7,500 ordinary gain.
D) $7,500 capital gain.
E) None of the choices are correct.

Accepted Answer

§1245 recaptures the lesser of depreciation taken ($12,500) or gain ($7,500) as ordinary income. Any remaining gain would be §1231 gain.

Question 19

The sale of land held for investment results in the following type of gain or loss?
A) Capital.
B) Ordinary.
C) §1231.
D) §1245.
E) None of the choices are correct.

Accepted Answer

Assets held for investment generate capital gains or losses.

Question 20

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?
A) $25,000 ordinary and $50,000 unrecaptured §1250 gain.
B) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.
C) $75,000 ordinary gain.
D) $75,000 capital gain.
E) None of the choices are correct.

Accepted Answer

Unrecaptured §1250 recaptures the lesser of depreciation taken ($50,000) or gain ($75,000). This amount is then taxed at no more than 25 percent. The remaining $25,000 gain would be §1231 gain.

Quiz 11: Property Dispositions

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

Leesburg sold a machine for $2,200 on November 10ᵗʰ 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?

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

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

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

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

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

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten 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?

The sale of computer equipment used in a trade or business for 9 months results in the following type of gain or loss?

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

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

Which of the following is True regarding depreciation recapture?

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?

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

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?

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?

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

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?

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

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?