Question 1

Stella purchased vacant land in 2010 that she subdivided for resale as lots. All 10 of the lots were sold during 2017. The lots had a tax basis of $12,000 each and sold for $35,000 each. Stella made no substantial improvements to the lots. She acted as her own real estate broker; so there were no sales expenses for selling the lots. Which of the following statements is correct?

Accepted Answer

The answer of Stella purchased vacant land in 2010 that...

Question 2

Recognized gains and losses from disposition of a capital asset may occur as a result of a:

Accepted Answer

Recognized gains and losses from the disposition of a capital asset can occur from any of the given events: sale, exchange, casualty, or condemnation. Therefore, the correct answer is all of the above (E).

Question 3

Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley?

Accepted Answer

The answer of Stanley operates a restaurant as a sole...

Question 4

The tax law requires that capital gains and losses be separated from other types of gains and losses. Among the reasons for this treatment are:

Accepted Answer

Both options A and C are correct. Long-term capital gains are taxed at a lower rate than ordinary gains, and net capital loss can only be deductible up to $3,000 per year for individual taxpayers. Option B is incorrect because short-term capital losses are deductible, just not as much as long-term capital losses. Therefore, the best choice is D.

Question 5

Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?

Accepted Answer

A capital asset is typically an investment held for the long-term, which is not held for sale in the ordinary course of business. Option B specifically designates securities held for investment, which would qualify as a capital asset. Options A, C, D, and E all include securities that may be held for sale in the ordinary course of business, and therefore would not necessarily qualify as capital assets.

Question 6

All collectibles short-term gain is subject to a potential alternative tax rate of 28%.

Accepted Answer

The answer of All collectibles short-term gain is subject to...

Question 7

On June 1, 2017, Brady purchased an option to buy 1,000 shares of General, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Brady decided to let the option lapse as of December 1, 2017. On his 2017 tax return, what should Brady report?

Accepted Answer

The cost of the option ($3,000) is considered a short-term capital loss since the option was held for less than one year. Since Brady decided to let the option lapse and did not exercise it, there is no additional gain or loss to report on his tax return. Therefore, option B is the best choice.

Question 8

Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. Hiram assigned all substantial rights in the patent. Which of the following is correct?

Accepted Answer

Hiram had no tax basis in the patent, so the entire $800,000 payment is considered a long-term capital gain. The royalty payments are also considered long-term capital gain since Hiram assigned all substantial rights in the patent.

Question 9

Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold Company (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold Company also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?

Accepted Answer

The answer of Gold Company signs a 13-year franchise agreement...

Question 10

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

Accepted Answer

When the option is exercised, the purchaser adds the cost of the option to the basis of the property. This is because the cost of the option is considered a part of the overall purchase price of the property.

Question 11

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

Accepted Answer

The answer of Short-term capital losses are netted against long-term...

Question 12

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:

Accepted Answer

Since the inventory was held for more than one year and was sold at a gain, it qualifies as a long-term capital asset. However, as a business taxpayer, the gain is considered an ordinary gain and not a capital gain. Therefore, the correct answer is D - an ordinary gain.

Question 13

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee. The tenant wanted to get out of its lease so it could move to a different building. The lessor had held the lease for three years before it was canceled. The lessor had a zero tax basis for the lease. The lessor has received:

Accepted Answer

The $45,000 cancellation fee is considered ordinary income for the lessor since they had a zero tax basis in the lease. There is no capital gain or loss involved in this transaction.

Question 14

A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15%/20% net long-term capital gain.

Accepted Answer

This is correct according to the IRS rules for capital gains and losses. A net short-term capital loss is first applied to offset any net long-term capital gain taxed at the highest rate of 28%, before being applied to any net long-term capital gain taxed at lower rates of 25%, 15%, or 0%/20%.

Question 15

An individual taxpayer with 2017 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2018.

Accepted Answer

This is true. An individual taxpayer with a net short-term capital loss of $5,000 can deduct up to $3,000 for AGI in 2017 and carry the remaining $2,000 forward to offset future capital gains or be used in future tax years.

Question 16

A worthless security had a holding period of 6 months when it became worthless on December 10, 2017. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?

Accepted Answer

A worthless security is treated as a capital loss, and since the holding period for the security is less than one year, the loss is considered as short-term capital loss. The investor can use this loss to offset any capital gains made during the year and up to $3,000 of ordinary income.

Question 17

Michael is in the business of creating posters (display art) for the movie industry. He creates a poster and sells it for a lump sum. He has:

Accepted Answer

The answer of Michael is in the business of creating...

Question 18

Lana purchased for $1,410 a $2,000 bond when it was issued two years ago. Lana amortized $200 of the original issue discount and then sold the bond for $1,800. Which of the following statements is correct?

Accepted Answer

The original cost of the bond for Lana is $1,410. She amortized $200 of the original issue discount, which reduces her cost basis to $1,210 ($1,410 - $200).

When she sold the bond for $1,800, she realized a gain of $590 ($1,800 - $1,210). Since she held the bond for more than one year, this is a long-term capital gain.

Therefore, the correct answer is B: Lana has $190 of long-term capital gain.

Question 19

The possible holding periods for capital assets include:

Accepted Answer

The holding periods for capital assets are categorized as short-term and long-term. The short-term holding period is up to 12 months, while the long-term holding period is greater than 12 months. Option A is incorrect as the holding period for short-term is up to 12 months and not 14 months. Option B is incorrect as the long-term holding period is greater than 12 months and not six months. Option D is incorrect as the short-term holding period is up to 12 months and not greater than 12 months.

Question 20

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Accepted Answer

This statement is incorrect. Short-term capital gain is always taxed at a higher rate than long-term capital gain, regardless of the amount. Currently in the United States, short-term capital gains are taxed at the individual's ordinary income tax rate, while long-term capital gains have special tax rates depending on the individual's income level.

Quiz 16: Property Transactions: Capital Gains and Losses