Question 1

Dinah owned land with a FMV of $130,000 (adjusted basis $120,000)which is investment property (a capital asset).Dinah owned a second tract of land,a 1231 asset,with a FMV of $46,000 (adjusted basis $50,000).Both tracts were acquired in 2001 and condemned by the state this year.The state paid an amount equal to FMV.If there are no other transactions involving capital assets or 1231 assets,Dinah must report on her current year return

Accepted Answer

The answer of Dinah owned land with a FMV of...

Question 2

If Section 1231 applies to the sale or exchange of an unharvested crop sold with land,the costs of producing the crop are

Accepted Answer

The answer of If Section 1231 applies to the sale...

Question 3

During the current year,Hugo sells equipment for $150,000.The equipment cost $175,000 when placed in service two years ago,and $55,000 of depreciation deductions were allowed.The results of the sale are

Accepted Answer

The answer of During the current year,Hugo sells equipment for...

Question 4

In order to be considered Sec.1231 property,all of the following livestock must be held for 12 months or more from date of acquisition except

Accepted Answer

The answer of In order to be considered Sec.1231 property,all...

Question 5

An unincorporated business sold two warehouses during the current year.The straight-line depreciation method was used for the first building and the accelerated method (ACRS)was used for the second building.Information about those buildings is presented below.  How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

Accepted Answer

To calculate the gain/loss from the sale of an asset, we need to calculate the adjusted basis and the amount realized. 
Adjusted basis = Original cost - Accumulated Depreciation 
Amount realized = Sale price - Selling expenses

For the first building:
Original cost = $500,000 
Depreciation = $500,000 / 30 years = $16,667 per year 
Accumulated depreciation for the current year = $16,667 x 10 years = $166,670 
Adjusted basis = $500,000 - $166,670 = $333,330 
Sale price = $400,000 
Selling expenses = $20,000 
Amount realized = $400,000 - $20,000 = $380,000 
The gain from the sale of the first building is: 
$380,000 - $333,330 = $46,670

For the second building: 
Original cost = $800,000 
ACRS depreciation percentage = 20% 
ACRS depreciation for the current year = $800,000 x 20% = $160,000 
Accumulated depreciation for the current year = $160,000 x 7 years = $1,120,000 
Adjusted basis = $800,000 - $1,120,000 = $(320,000) 
Sale price = $600,000 
Selling expenses = $30,000 
Amount realized = $600,000 - $30,000 = $570,000 
The gain from the sale of the second building is: 
$570,000 - $(320,000) = $890,000

Since both buildings were used in the taxpayer's business, the gain should be reported as section 1231 gain. However, because the ACRS depreciation method was used for the second building, there will be ordinary income due to depreciation recapture. 
The amount of ordinary income due to depreciation recapture is the lesser of: 
1. The total amount of depreciation taken (in excess of straight-line depreciation) 
2. The gain from the sale of the asset

For the second building, the ACRS depreciation taken was $160,000 x 7 years = $1,120,000. The gain from the sale was $890,000. Therefore, the ordinary income due to depreciation recapture is $890,000.

Total gain from the sale is: 
$46,670 (first building) + $890,000 (second building) = $936,670

Therefore, the best choice is B.

Question 6

All of the following statements are true regarding Sec.1245 are true except

Accepted Answer

The answer of All of the following statements are true...

Question 7

Terry has sold equipment used in her business.She acquired three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use.In order to recognize any Sec.1231 gain,she must sell the equipment for more than

Accepted Answer

The answer of Terry has sold equipment used in her...

Question 8

A corporation owns many acres of timber,which it acquired three years ago,and which has a $120,000 basis.The timber was cut last year for use in the corporation's business.The FMV of the timber on the first day of last year was $270,000.The corporation made the appropriate election to treat the cutting as a sale or exchange.The timber is sold for $300,000 this year.The tax result this year is

Accepted Answer

The answer of A corporation owns many acres of timber,which...

Question 9

Emma owns a small building ($120,000 basis and $123,000 FMV)and equipment ($35,000 basis and $22,000 FMV).Both assets were acquired three years ago,are used in Emma's business,and are depreciated using straight-line depreciation.Both are destroyed by fire.Insurance proceeds were equal to their FMVs.Only one other transfer of an asset occurs during the year,and a $3,000 LTCL is recognized.After considering all transactions,the tax result to Emma is a

Accepted Answer

D)If the losses from involuntary conversion arising from fire exceed the gains,the gains and losses are treated as ordinary gains and losses which is the case in this problem.$123,000 - $120,000 = $3,000 gain; $22,000 - $35,000 = $13,000 loss.The casualty results in an ordinary net loss of $10,000.

Question 10

For a business,Sec.1231 property does not include

Accepted Answer

Sec. 1231 property includes depreciable property and real property used in a trade or business, but excludes inventory held for sale to customers. Therefore, option B - inventory purchased 24 months ago - is not considered as Sec. 1231 property.

Question 11

Harry owns equipment ($50,000 basis and $38,000 FMV)and a building ($140,000 basis and $156,000 FMV),which are used in his business.Harry uses straight-line depreciation for both assets,which were acquired several years ago.Both the equipment and the building are destroyed in a fire,and Harry collects insurance proceeds equal to the assets' FMV.The tax result to Harry for this transaction is

Accepted Answer

The involuntary conversions of business assets are treated as Sec. 1231 gains and losses. This means that any gain or loss from the destruction of the equipment and building would be included in Harry's Sec. 1231 calculation for the year. If the result is a net Sec. 1231 gain, it would be treated as long-term capital gain. If the result is a net Sec. 1231 loss, it would be treated as an ordinary loss. In this case, Harry would have a net Sec. 1231 loss since the FMV of the assets was higher than their basis, so the loss would be deductible as an ordinary loss.

Question 12

Which of the following assets is 1231 property?

Accepted Answer

1231 property refers to depreciable or real property held for more than one year and used in a trade or business, including machines used in manufacturing operations.

Question 13

For livestock to be considered Section 1231 property,

Accepted Answer

According to IRS regulations, to be considered Section 1231 property, cattle and horses must be held for at least 24 months from the date of acquisition. Therefore, option C is the correct choice.

Question 14

During the current year,a corporation sells equipment for $300,000.The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed.The results of the sale are

Accepted Answer

The sale of the equipment results in a total gain of $90,000 ($300,000 sale price - $270,000 cost - $60,000 depreciation). Since $60,000 of depreciation deductions were previously allowed, this amount must be recaptured as ordinary income. The remaining gain of $30,000 is a Section 1231 gain, which is taxed at the lower capital gains rate. Therefore, the correct answer is D, which states that there is ordinary income of $60,000 and a Section 1231 gain of $30,000.

Question 15

A building used in a business for more than a year is sold.Sec.1250 will not cause depreciation recapture if

Accepted Answer

According to Sec.1250, depreciation recapture occurs when a building used in a business is sold. However, if the building is fully depreciated or it was placed in service after 1986 (after the Tax Reform Act of 1986), or straight-line depreciation was used, then no depreciation recapture will occur. Therefore, all of the above choices are correct.

Question 16

Section 1231 property will generally have all the following characteristics except

Accepted Answer

Section 1231 property must be real or depreciable property that is used in a trade or business and held for more than one year. It is not held for sale to customers as this would classify it as inventory.

Question 17

A corporation owns many acres of timber,which it acquired three years ago,and which has a $150,000 basis for depletion.The timber is cut during the current year for use in the corporation's business.The FMV of the timber on the first day of the current year is $280,000.If the corporation makes the appropriate election,the tax result is

Accepted Answer

The answer of A corporation owns many acres of timber,which...

Question 18

Blair,whose tax rate is 28%,sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000.Both tracts of land are Sec.1231 property.She has never had any other Sec.1231 transactions.How are the gains taxed?

Accepted Answer

Both gains are classified as Sec.1231 property, so they are combined to calculate a net Sec.1231 gain of $40,000. Since Blair's tax rate is 28%, the gain is taxed at the capital gains rate of 15%.

Question 19

Cassie owns equipment ($45,000 basis and $30,000 FMV)and a building ($152,000 basis and $158,000 FMV),which are used in Cassie's business.Cassie has used straight-line depreciation for both assets,which were acquired two years ago.Both the equipment and the building are destroyed in a fire,and Cassie collects insurance proceeds equal to the assets' FMV.The tax result to Cassie for this transaction is a

Accepted Answer

B)If the losses from involuntary conversion arising from fire exceed the gains,the gains and losses are treated as ordinary gains and losses which is the case in this problem.$30,000 - $45,000 = $15,000 loss; $158,000 - $152,000 = $6,000 gain.

Question 20

Section 1245 recapture applies to all the following except

Accepted Answer

Section 1245 recapture only applies to gain on the sale or exchange of depreciable personal property and amortizable intangible personal property. It does not apply to assets sold or exchanged at a loss. Total depreciation or amortization allowed or allowable is a factor in determining the amount of gain subject to recapture.

Quiz 13: Property Transactions: Section 1231 and Recapture