Question 1

Which one of the following is not true regarding a like-kind exchange?

Accepted Answer

The answer of Which one of the following is not...

Question 2

Ashburn reported a $105,000 net §1231 gain in year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during years 1-5, what amount of Ashburn's net §1231 gain for year 6, if any, is treated as ordinary income?

Accepted Answer

The answer of Ashburn reported a $105,000 net §1231 gain...

Question 3

Mary traded furniture used in her business to a furniture dealer for some new furniture. Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange. The new furniture had a fair market value of $40,000. Mary also gave $4,000 to the dealer in the transaction. What is Mary's adjusted basis in the new furniture after the exchange?

Accepted Answer

The answer of Mary traded furniture used in her business...

Question 4

Which one of the following is not considered boot in a like-kind exchange?

Accepted Answer

The answer of Which one of the following is not...

Question 5

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?

Accepted Answer

The answer of What is the primary purpose of a...

Question 6

Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?

Accepted Answer

(1) Automobile: $12,000 loss, treated as ordinary loss.
(2) Machinery: $5,000 loss (proceeds $10,000 - adjusted basis $20,000), treated as §1231 loss.
(3) Furniture: $6,000 loss, treated as ordinary loss.
(4) Computer equipment: $19,000 gain (proceeds $10,000 - adjusted basis $6,000 - unrecaptured losses $3,000), treated as §1231 gain.
Total gains and losses before the 1231 netting process:
Ordinary loss: $18,000
Ordinary gain: $19,000
§1231 loss: $10,000
§1231 gain: $19,000 - $3,000 = $16,000
Therefore, the best choice is (B) $7,000 ordinary gain, $10,000 §1231 loss.

Question 7

Which one of the following is not a requirement of a deferred like-kind exchange?

Accepted Answer

A deferred like-kind exchange must satisfy the requirements of identifying the property to be received within 45 days and completing the exchange within 180 days, and often involves using a third party intermediary. However, there is no requirement for the exchange to be completed within the taxable year.

Question 8

How long does a taxpayer have to identify replacement property in a like-kind exchange?

Accepted Answer

According to the IRS, a taxpayer must identify potential replacement property within 45 days after the transfer of the relinquished property.

Question 9

Which of the following is not true regarding §1239?

Accepted Answer

§1239 applies to gains on sales of all depreciable property, not just non-residential real property. Therefore, choice C is not true.

Question 10

Brandon, an individual, began business four years ago and has never sold a §1231 asset. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: $$\begin{array} { | l | r | r | r | } 
\hline { \text { Asset } } & \text { Original Cost } & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { Gain/Loss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Computers } & 10,000 & 6,000 & ( 2,000 ) \
\hline \text { Building } & 90,000 & 20,000 & ( 2,000 ) \
\hline
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

The gain from the sale of the machinery is subject to depreciation recapture under §1245, resulting in $7,000 of ordinary income. The net §1231 loss from the computers and building is $1,000, which offsets the ordinary income, resulting in $6,000 ordinary income. The tax liability is 35% of $6,000, which is $2,100.

Question 11

Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery. Arlington originally purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at the time of the exchange. The new machinery had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's gain or loss recognized on the exchange?

Accepted Answer

The answer of Arlington LLC traded machinery used in its...

Question 12

The general rule regarding the exchanged basis in a like-kind exchange is:

Accepted Answer

According to the general rule, the basis of the new property acquired in a like-kind exchange is equal to the adjusted basis of the old property. This means that any basis adjustments made to the old property will also apply to the new property. Option A is incorrect because fair market value does not determine basis in a like-kind exchange. Option B is incorrect because the basis of the old property is not relevant to determining the basis of the new property. Option D is incorrect because the cost basis of the old property is also not relevant to determining the basis of the new property. Option E is incorrect because not all of the choices are correct.

Question 13

Koch traded machine 1 for machine 2. Koch originally purchased machine 1 for $75,000 and machine 1's adjusted basis was $40,000 at the time of the exchange. Machine 2's seller purchased it for $65,000 and machine 2's adjusted basis was $55,000 at the time of the exchange. What is Koch's adjusted basis in machine 2 after the exchange?

Accepted Answer

The answer of Koch traded machine 1 for machine 2....

Question 14

Which of the following is not an involuntary conversion?

Accepted Answer

Involuntary conversions refer to the loss of property without the owner's consent. Hurricanes, imminent domain, and fire damage are examples of involuntary conversions. A foreclosure, however, is not an involuntary conversion because it occurs as a result of the owner's failure to make mortgage payments, which is a volitional act.

Question 15

Which of the following is true regarding the §1231 look-back rule?

Accepted Answer

The §1231 look-back rule applies when there is a §1231 gain and a nonrecaptured §1231 loss in the prior five years. It does not apply only when there is a §1231 loss or a nonrecaptured §1231 gain.

Question 16

Why does §1250 recapture generally no longer apply?

Accepted Answer

The Tax Reform Act of 1986 changed the rules for depreciation of real property, requiring it to be depreciated on a straight-line basis over a longer period of time. This change eliminated the need for §1250 recapture in many cases, as gain on the sale of the property would be taxed at the lower long-term capital gains rate instead of the higher ordinary income rate.

Question 17

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

Accepted Answer

§1239 applies to sales or exchanges of property between related persons, and the gain is treated as ordinary income to the extent of any depreciation claimed on the property. In this case, Alpha sold machinery to Beta, a related entity, and had claimed $30,000 depreciation expense, so $30,000 of the gain will be treated as ordinary income under §1239. The remaining $10,000 is a capital gain under §1231. Therefore, choice A is the best answer.

Question 18

Each of the following is true except for:

Accepted Answer

The answer of Each of the following is true except...

Question 19

When does unrecaptured §1250 gains apply?

Accepted Answer

Unrecaptured §1250 gains apply only when non-corporate taxpayers sell depreciable real property at a gain. So, option B is correct. Option A is incorrect as making the election is related to different rules. Option C is incorrect because it is related to the interaction of §1245 and §1250, not specifically to unrecaptured §1250 gains. Option D is incorrect as it is related to pre-1986 rules, which are not applicable for current tax years. Option E is incorrect as there is a definite situation where unrecaptured §1250 gains apply.

Question 20

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: $$\begin{array} { | l | r | r | r | } 
\hline { \text { Asset } } & \text { Original Cost } & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { Gain/Loss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Land } & 40,000 & 0 & 20,000 \
\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \
\hline
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

First, we need to determine whether the assets sold are classified as §1231 assets or not. In this case, all three assets belong to §1231 assets because they are business assets that have been held for more than one year.

Next, we need to calculate the gain or loss for each asset.

For Machinery: 
Sales Price = $30,000 - $7,000 + $10,000 = $33,000 
Adjusted Basis = $30,000 - $7,000 = $23,000 
Realized Gain = $33,000 - $23,000 = $10,000 
Since the asset has been held for more than a year, the gain is classified as a §1231 gain.

For Land: 
Sales Price = $40,000 + $20,000 = $60,000 
Adjusted Basis = $40,000 
Realized Gain = $60,000 - $40,000 = $20,000 
Since the asset has been held for more than a year, the gain is classified as a §1231 gain.

For Building: 
Sales Price = $90,000 - $20,000 - $5,000 = $65,000 
Adjusted Basis = $90,000 - $20,000 = $70,000 
Realized Loss = $65,000 - $70,000 = $(5,000)$ 
Since the asset has been held for more than a year, the loss is classified as a §1231 loss.

Now we need to determine the net §1231 gain or loss. 
§1231 Gain = $10,000 + $20,000 = $30,000 
§1231 Loss = $(5,000)$ 
Net §1231 Gain = $30,000 - $5,000 = $25,000

Since Brandon has a §1231 net gain, he needs to apply the §1231 tax treatment. The net gain is first offset against any §1231 losses from prior years, which in this case is $5,000. The remaining gain of $20,000 is classified as long-term capital gain and taxed at a maximum rate of 20 percent.

Now we need to calculate Brandon's ordinary income tax liability. 
Gain from Machinery = $10,000 x 35% = $3,500 
Loss from Building = $(5,000) x 35% = $(1,750) 
Gain from Land = $20,000 x 35% = $7,000 
Total ordinary income = $10,750

Finally, we need to calculate Brandon's total tax liability. 
Tax on §1231 gain = $20,000 x 20% = $4,000 
Tax on ordinary income = $10,750 x 35% = $3,763 
Total tax liability = $4,000 + $3,763 = $7,763

Therefore, the answer is C) $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability.

Quiz 10: Property Dispositions