Question 1

"Recapture of depreciation" refers to:

Accepted Answer

"Recapture of depreciation" refers to taxing the smaller of past depreciation or gain as ordinary income on the disposition of equipment. This occurs when the equipment is sold or disposed of and the amount of gain realized is less than the depreciation amount claimed as deductions in previous years. In this case, the difference between the depreciation amount and the gain realized is "recaptured" and taxed as ordinary income.

Question 2

During 2017,Ester recognizes a $10,000 Section 1231 gain,a $25,000 Section 1231 loss,and ordinary income of $20,000.What are the results of Ester's netting of these items?

Accepted Answer

The net Section 1231 loss of $15,000 ($10,000 gain - $25,000 loss) is treated as an ordinary loss, which offsets the ordinary income of $20,000, resulting in $5,000 ordinary income.

Question 3

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2017.Before 2017,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2013.How should Ramona report her 2017 transactions?

Accepted Answer

The answer of Ramona recognizes a $50,000 Section 1231 loss,a...

Question 4

George purchased a commercial building in 1999 for $900,000.During 2017,the building is sold for $700,000.The actual accelerated depreciation on the building as of the sale date was $400,000.Straight-line depreciation for the same period would have been $350,000.What is the amount and character of the gain recognized on the sale?

Accepted Answer

To calculate the gain recognized on the sale, we need to compare the adjusted basis (purchase price minus accumulated depreciation) to the sales price.

The adjusted basis in 2017 would be:
$900,000 - $400,000 = $500,000

The amount realized from the sale is $700,000, so the gain is:
$700,000 - $500,000 = $200,000

However, since the building was subject to accelerated depreciation, some of the gain may be treated as unrecaptured Section 1250 gain. To calculate this, we need to compare the amount of accelerated depreciation taken to the straight-line depreciation that could have been taken.

The accelerated depreciation taken would be:
$400,000

The straight-line depreciation for the same period would have been:
$350,000

The difference is:
$400,000 - $350,000 = $50,000

Therefore, the gain should be reported as:
- $50,000 of Section 1250 ordinary income 
- $150,000 of unrecaptured Section 1250 gain.

Question 5

In 2014,Jim had a $5,000 net Section 1231 gain.In 2016,Jim reported a Section 1231 loss of $12,000.In 2017,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2017.What is Jim's ordinary income from his 2017 property transactions?

Accepted Answer

The answer of In 2014,Jim had a $5,000 net Section...

Question 6

Johnson Corporation's 2017 business operating income is $200,000.Johnson also recognizes an $8,000 Section 1231 loss,an $11,000 Section 1231 gain,and a $5,000 long-term capital loss from the sale of investment securities.What is Johnson Corporation's 2017 taxable income?

Accepted Answer

The answer of Johnson Corporation's 2017 business operating income is...

Question 7

Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity?

Accepted Answer

Section 1231 losses from the sale of depreciable business property are treated as ordinary losses, which means they can be fully deducted against ordinary income. This treatment allows taxpayers to benefit from a full deduction at their ordinary income tax rates, rather than being limited to the capital loss treatment, which might be less advantageous.

Question 8

Depreciation recapture provisions
I.are reclassification provisions.
II.apply to depreciable assets sold at a gain.
​

Accepted Answer

Depreciation recapture provisions are indeed reclassification provisions that require the portion of the gain attributable to depreciation to be taxed as ordinary income rather than capital gain. They apply specifically to depreciable assets that are sold at a gain, ensuring that the tax benefits received from depreciation are effectively "recaptured" by the IRS at ordinary income rates.

Question 9

Benson Company purchased a drill press on November 13,2013,at a cost of $30,000.Benson sells the drill press on January 3,2017,for $16,000.Regular MACRS depreciation on the drill press would be $18,500,while straight-line MACRS depreciation would total $12,000.
I.If Benson used regular MACRS depreciation,it would have a Section 1231 gain of $4,500.
II.If Benson used straight-line depreciation,it would have a Section 1231 loss of $2,000.
III.If Benson used regular MACRS depreciation,it would have Section 1245 ordinary income of $4,500.
IV.If Benson used straight-line depreciation,it would have an ordinary loss of $4,500.
​

Accepted Answer

If Benson used straight-line depreciation, the adjusted basis would be $18,000 ($30,000 - $12,000), resulting in a Section 1231 loss of $2,000 ($18,000 - $16,000). If Benson used regular MACRS depreciation, the adjusted basis would be $11,500 ($30,000 - $18,500), resulting in Section 1245 ordinary income of $4,500 ($16,000 - $11,500).

Question 10

Unrecaptured Section 1250 gain
I.is subject to a maximum tax rate of 25%.
II.applies only to real property owned by individuals.
​

Accepted Answer

The answer of Unrecaptured Section 1250 gain
I.is subject to a...

Question 11

Karl paid $200,000 for business-use equipment.Using straight-line depreciation,his deduction would have been $22,000,but Karl uses MACRS depreciation and deducts $37,500 for the first two years of usage.At the beginning of the third year,Karl sells the equipment for $190,000.How much of the gain is recaptured under Section 1245 as ordinary income?

Accepted Answer

The MACRS deductions for the first two years add up to $37,500. This leaves a remaining undepreciated basis of $200,000 - $37,500 = $162,500 at the beginning of the third year.
When Karl sells the equipment for $190,000, he realizes a gain of $190,000 - $162,500 = $27,500. This gain is recaptured as ordinary income under Section 1245. Therefore, the answer is D) $27,500.

Question 12

Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2007 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Accepted Answer

The gain is calculated as the sale price ($3,000,000) minus the adjusted basis ($2,000,000 - $1,200,000 depreciation = $800,000), resulting in a $2,200,000 gain. The $1,200,000 depreciation is recaptured as Section 1245 ordinary income, and the remaining $1,000,000 is a Section 1231 gain.

Question 13

Marybelle paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Marybelle deducts $24,868 for the first two years of usage.At the beginning of the third year,Marybelle sells the warehouse for $380,000.What is the character of the gain.

Accepted Answer

Since Marybelle is using straight-line depreciation over 39 years, the entire cost of the warehouse would be fully depreciated at the end of 39 years. Therefore, when Marybelle sells the warehouse in the third year, she still has a portion of the cost basis that has not been fully depreciated. This portion is called the unrecaptured section 1250 gain, which is taxed at a maximum rate of 25%. Therefore, the character of the gain in this situation is an unrecaptured section 1250 gain.

Question 14

Phillip owns rental real estate with an adjusted basis of $200,000.During the current year,he sells the property for $170,000.
I.If Phillip's rental activity is a trade or business,the loss is a Section 1231 loss.
II.If Phillip's rental activity is a production-of-income (investment)activity,the loss is a capital loss.
​

Accepted Answer

Statement I is correct because Section 1231 of the Internal Revenue Code applies to depreciable property and real estate used in a trade or business, allowing losses to be treated as ordinary losses rather than capital losses. Statement II is correct because if the rental activity is considered an investment rather than a trade or business, the loss from the sale of the property would indeed be treated as a capital loss.

Question 15

Troy Company purchased a printing press on April 13,2014 at a cost of $30,000.Troy sells the printing press on January 3,2017 for $16,000.Regular MACRS depreciation on the printing press would be $18,500,while straight-line MACRS depreciation would total $12,000.
I.If Troy used straight-line depreciation,it would have a Section 1231 loss of $2,000.
II.If Troy used regular MACRS depreciation,it would have Section 1245 ordinary income of $4,500.
​

Accepted Answer

If Troy used straight-line depreciation, the adjusted basis would be $18,000 ($30,000 - $12,000), resulting in a Section 1231 loss of $2,000 ($18,000 - $16,000). If Troy used regular MACRS depreciation, the adjusted basis would be $11,500 ($30,000 - $18,500), resulting in Section 1245 ordinary income of $4,500 ($16,000 - $11,500).

Question 16

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below.
​

In 2017,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2017 as a result of this net Section 1231 gain?

Accepted Answer

In 2017, Fillmore has a net Section 1231 gain of $15,000, which is classified as ordinary income. Fillmore would report the $15,000 as ordinary income in 2017. Therefore, option B is the correct answer.

Question 17

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.Allowable depreciation of $8,000 had been deducted as of the sale date.What is the amount and character of the gain or (loss)on the sale of the equipment?

Accepted Answer

The answer of Olive Company sells factory equipment with an...

Question 18

Mountainview Corporation sells depreciable residential real estate for $525,000.The property cost $675,000,and $200,000 of accelerated depreciation was deducted on the property.Allowable straight-line depreciation for the same period would have been $180,000.Which of the following correctly states the character of the gain from the sale of the property?

Accepted Answer

The property was sold for $525,000, which results in a $150,000 ($525,000 - $375,000) gain after subtracting the adjusted basis ($675,000 - $200,000 accelerated depreciation). 
Since the property is residential real estate, it is subject to depreciation recapture under Section 1250. The allowable straight-line depreciation for the property over the holding period would have been $180,000. Therefore, $20,000 of the gain is ordinary income under Section 1250 (because it is the amount of accelerated depreciation taken) and $30,000 is a Section 1231 gain (because it is the excess of the total gain over the amount subject to Section 1250 rules). Therefore, the correct answer is (C) $30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.

Question 19

Unrecaptured Section 1250 gain
I.applies to real property owned by individuals and corporations.
II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.
​

Accepted Answer

Unrecaptured Section 1250 gain only applies to real property that is not already classified as ordinary income if the property were Section 1245 property. It does not apply to corporations, only to individuals. Therefore, statement II is correct and statement I is incorrect.

Question 20

Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?

Accepted Answer

The answer of Elizabeth paid $400,000 for a warehouse.Using 39-year...

Quiz 11: Property Dispositions

"Recapture of depreciation" refers to:

During 2017,Ester recognizes a $10,000 Section 1231 gain,a $25,000 Section 1231 loss,and ordinary income of $20,000.What are the results of Ester's netting of these items?

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2017.Before 2017,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2013.How should Ramona report her 2017 transactions?

In 2014,Jim had a $5,000 net Section 1231 gain.In 2016,Jim reported a Section 1231 loss of $12,000.In 2017,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2017.What is Jim's ordinary income from his 2017 property transactions?

Johnson Corporation's 2017 business operating income is $200,000.Johnson also recognizes an $8,000 Section 1231 loss,an $11,000 Section 1231 gain,and a $5,000 long-term capital loss from the sale of investment securities.What is Johnson Corporation's 2017 taxable income?

Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity?

Depreciation recapture provisions I.are reclassification provisions. II.apply to depreciable assets sold at a gain.

Unrecaptured Section 1250 gain I.is subject to a maximum tax rate of 25%. II.applies only to real property owned by individuals.

Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2007 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Marybelle paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Marybelle deducts $24,868 for the first two years of usage.At the beginning of the third year,Marybelle sells the warehouse for $380,000.What is the character of the gain.

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. In 2017,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2017 as a result of this net Section 1231 gain?

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.Allowable depreciation of $8,000 had been deducted as of the sale date.What is the amount and character of the gain or (loss) on the sale of the equipment?

Unrecaptured Section 1250 gain I.applies to real property owned by individuals and corporations. II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.

Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?

Quiz 11: Property Dispositions

"Recapture of depreciation" refers to:

During 2017,Ester recognizes a $10,000 Section 1231 gain,a $25,000 Section 1231 loss,and ordinary income of $20,000.What are the results of Ester's netting of these items?

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2017.Before 2017,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2013.How should Ramona report her 2017 transactions?

In 2014,Jim had a $5,000 net Section 1231 gain.In 2016,Jim reported a Section 1231 loss of $12,000.In 2017,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2017.What is Jim's ordinary income from his 2017 property transactions?

Johnson Corporation's 2017 business operating income is $200,000.Johnson also recognizes an $8,000 Section 1231 loss,an $11,000 Section 1231 gain,and a $5,000 long-term capital loss from the sale of investment securities.What is Johnson Corporation's 2017 taxable income?

Which of the following best describes the tax treatment of a taxpayer's net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity?

Depreciation recapture provisions I.are reclassification provisions. II.apply to depreciable assets sold at a gain. ​

Unrecaptured Section 1250 gain I.is subject to a maximum tax rate of 25%. II.applies only to real property owned by individuals. ​

Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2007 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Marybelle paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Marybelle deducts $24,868 for the first two years of usage.At the beginning of the third year,Marybelle sells the warehouse for $380,000.What is the character of the gain.

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. ​ In 2017,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2017 as a result of this net Section 1231 gain?

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.Allowable depreciation of $8,000 had been deducted as of the sale date.What is the amount and character of the gain or (loss) on the sale of the equipment?

Unrecaptured Section 1250 gain I.applies to real property owned by individuals and corporations. II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property. ​

Elizabeth paid $400,000 for a warehouse.Using 39-year straight-line depreciation,Elizabeth deducts $24,868 for the first two years of usage.At the beginning of the third year,Elizabeth sells the warehouse for $380,000.How much of the gain is recaptured as Section 1250 ordinary income?

Depreciation recapture provisions I.are reclassification provisions. II.apply to depreciable assets sold at a gain.

Unrecaptured Section 1250 gain I.is subject to a maximum tax rate of 25%. II.applies only to real property owned by individuals.

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. In 2017,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2017 as a result of this net Section 1231 gain?

Unrecaptured Section 1250 gain I.applies to real property owned by individuals and corporations. II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.