Question 1

Assets held for investment and personal use assets are examples of capital assets.

Accepted Answer

Assets held for investment and personal use assets are both considered capital assets under accounting standards. Assets held for investment and personal use assets fall under the category of capital assets.

Question 2

For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

Accepted Answer

§291 of the Internal Revenue Code requires corporations to recapture a portion of their depreciation as ordinary income when they sell or dispose of certain property. The recapture amount is 20 percent of the lesser of the depreciation taken or the realized gain. This statement is true. Section 291 of the Internal Revenue Code requires corporations to recapture 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

Question 3

Accounts receivable and inventory are examples of ordinary assets.

Accepted Answer

Accounts receivable and inventory are examples of current assets, which are considered ordinary assets because they are part of a company's normal operations and are not unique or specialized. Accounts receivable and inventory are examples of ordinary assets that are part of a company's current assets.

Question 4

A parcel of land is always a capital asset.

Accepted Answer

A parcel of land can be considered a capital asset if it is held by the owner for investment purposes. However, if the land is used in a trade or business, such as in farming or as part of the inventory of a real estate developer, it is not treated as a capital asset but rather as a business asset.

Question 5

The gain or loss realized on the sale of an asset is always recognized for tax purposes.

Accepted Answer

The recognition of gain or loss for tax purposes can depend on various factors, including the type of asset, the nature of the transaction, and specific tax laws or provisions that may defer or exclude the recognition of gain or loss in certain situations.

Question 6

After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary.

Accepted Answer

This is true. The look-back rule applies to net §1231 gains and losses, and reclassifies them as either capital or ordinary based on a five-year look-back period. Net §1231 gains are reclassified as capital gains, while net §1231 losses are reclassified as ordinary losses. The look-back rule applies to net §1231 gains and losses that are being taxed as ordinary income. If, after applying the look-back rule, there is a net §1231 gain, it will be treated as long-term capital gains. If there is net §1231 loss, it will be treated as an ordinary loss.

Question 7

The gain or loss realized on the sale of an asset is the amount realized less the adjusted basis.

Accepted Answer

This statement is true. The gain or loss realized on the sale of an asset is calculated by subtracting the adjusted basis of the asset from the amount realized from the sale. This statement is true as per the fundamental principle of calculating gain or loss from the sale of an asset. The amount realized is the selling price, and the adjusted basis is the original cost of the asset adjusted for any depreciation or improvements made over time. Therefore, the gain or loss is calculated as the amount realized minus the adjusted basis.

Question 8

Taxpayers can recognize a taxable gain on the sale of an asset even though an asset's real economic value has declined.

Accepted Answer

Taxpayers are required to recognize a gain or loss on the sale of an asset based on the difference between the selling price and their basis (usually the purchase price). Even if the asset's real economic value has declined since its purchase, if the selling price is higher than the taxpayer's basis, a taxable gain must be recognized. Taxable gain is based on the difference between the sale price and the tax basis (i.e. original cost plus any additional costs of ownership). The real economic value of the asset may have declined, but if the sale price exceeds the tax basis, a taxable gain will still be recognized.

Question 9

§1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.

Accepted Answer

Section 1239 of the Internal Revenue Code treats the entire gain on the sale or exchange of depreciable property between certain related parties as ordinary income, not just 50%.

Question 10

The adjusted basis is the initial basis less cost recovery deductions.

Accepted Answer

This is correct. The adjusted basis of an asset is the original cost or purchase price minus any deductions taken for cost recovery over time, such as depreciation, amortization, or depletion. The adjusted basis of an asset takes into account any cost recovery deductions (such as depreciation) that have been taken since the asset was acquired. Therefore, the adjusted basis is calculated as the initial basis minus any cost recovery deductions.

Question 11

All tax gains and losses are ultimately characterized as either ordinary or capital.

Accepted Answer

This is true. All tax gains and losses are ultimately characterized as either ordinary or capital. Ordinary gains and losses are typically taxed at a higher rate than capital gains and losses. This is true. All tax gains and losses are ultimately characterized as either ordinary or capital.

Question 12

Depreciation recapture changes both the amount and character of a gain.

Accepted Answer

The answer of Depreciation recapture changes both the amount and...

Question 13

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent.

Accepted Answer

Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent. Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent under current tax law.

Question 14

§1231 assets include all assets used in a trade or business.

Accepted Answer

Section 1231 assets include depreciable property and real property (like buildings and equipment) used in a trade or business and held for more than one year. However, inventory, accounts receivable, and certain other assets are not considered §1231 assets even though they may be used in a trade or business.

Question 15

§1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in servicebefore 1987 as ordinary income.

Accepted Answer

§1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in service before 1987 as ordinary income. §1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in service before 1987 as ordinary income.

Question 16

Unrecaptured §1250 gains apply only to individuals.

Accepted Answer

The answer of Unrecaptured §1250 gains apply only to individuals....

Question 17

Generally, the amount realized is everything of value received in a sale less selling expenses.

Accepted Answer

This statement is true. The amount realized in a sale includes all forms of payment received and any other valuable assets or benefits received in the transaction, minus any expenses incurred to complete the sale. The amount realized is calculated as the total value received in a sale, minus any selling expenses that were incurred.

Question 18

Only accelerated depreciation is recaptured for §1245 assets.

Accepted Answer

Both accelerated depreciation and straight-line depreciation are recaptured for §1245 assets, but the recapture is treated as ordinary income to the extent of any gain realized on the sale, up to the total amount of depreciation taken on the asset.

Question 19

An asset's tax-adjusted basis is usually greater than its book-adjusted basis.

Accepted Answer

An asset's tax-adjusted basis is usually lower than its book-adjusted basis due to tax deductions and depreciation. An asset's tax-adjusted basis is usually lower than its book-adjusted basis due to various tax deductions and depreciation allowances.

Question 20

Ordinary gains and losses are obtained on the sale of investments.

Accepted Answer

Ordinary gains and losses typically result from the sale of assets or business operations that are not considered investments, such as inventory or equipment used in the business, rather than from the sale of investments, which usually result in capital gains or losses.

Quiz 3: Property Dispositions