Question 1

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 is depreciable real estate, so it falls under Section 1250. The allowed straight-line depreciation is $180,000, but $200,000 of accelerated depreciation was taken, resulting in a $20,000 depreciation recapture (ordinary income) under Section 1250.

The property was sold for a gain of $525,000-$475,000=$50,000. Since the property is held for more than a year and is a depreciable asset, the gain is categorized as a Section 1231 gain.

Therefore, the correct answer is C: $30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.

Question 2

In 2013,Jim had a $5,000 net Section 1231 gain.In 2015,Jim reported a Section 1231 loss of $12,000.In 2016,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2016.What is Jim's ordinary income from his 2016 property transactions?

Accepted Answer

The answer of In 2013,Jim had a $5,000 net Section...

Question 3

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

Under MACRS depreciation system, the equipment would have been fully depreciated over 5 years, with deduction of $37,500 for the first two years (Year 1: $100,000 x 20% = $20,000; Year 2: $100,000 x 32% = $32,000; Year 3: $100,000 x 19.2% = $19,200). As Karl sold the equipment at the beginning of the third year, only two years’ MACRS deductions can be taken into account.

Thus, the total allowable depreciation would be $52,000 ($20,000 + $32,000) and the adjusted basis would be $148,000 ($200,000 - $52,000).

When Karl sells the equipment for $190,000, he has a realized gain of $42,000 ($190,000 - $148,000).

Under Section 1245, the recapture amount would be equal to the lesser of two things: 
1. The gain on the sale of the asset ($42,000); and 
2. The amount of depreciation deductions previously taken on the asset ($52,000).

Since the gain on the sale of the asset ($42,000) is less than the amount of depreciation deductions previously taken on the asset ($52,000), the recapture amount is the gain on the sale of the asset, or $42,000.

However, only part of the realized gain is recaptured under Section 1245 as ordinary income. The rest of the gain is treated as long-term capital gain. The amount of gain that is recaptured under Section 1245 is equal to the lesser of two things: 
1. The recapture amount ($42,000); and 
2. The amount of gain realized ($42,000).

Since the recapture amount ($42,000) is less than the amount of gain realized ($42,000), the entire gain is recaptured under Section 1245 as ordinary income.

Therefore, the answer is D) $27,500 ($42,000 - $14,500, which is the remaining gain treated as long-term capital gain).

Question 4

George purchased a commercial building in 1999 for $900,000.During 2016,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

The building sold for $700,000, which is less than the original cost of $900,000, resulting in a loss of $200,000. However, the actual accelerated depreciation of $400,000 exceeds the straight-line depreciation of $350,000, resulting in a gain on the sale. This gain is considered Section 1250 ordinary income up to the amount of depreciation taken or allowable, which is $350,000. The remaining gain of $50,000 is an unrecaptured Section 1250 gain, subject to a maximum tax rate of 25%. Therefore, the amount and character of the gain recognized on the sale are $50,000 Section 1250 ordinary income and $150,000 unrecaptured Section 1250 gain.

Question 5

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 6

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 7

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 owned by individuals, not corporations. Statement II is correct as it defines what Unrecaptured Section 1250 gain is.

Question 8

Troy Company purchased a printing press on April 13,2013 at a cost of $30,000.Troy sells the printing press on January 3,2016 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 9

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2016.Before 2016,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2012.How should Ramona report her 2016 transactions?

Accepted Answer

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

Question 10

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 11

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 12

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below.  ​
In 2016,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2016 as a result of this net Section 1231 gain?

Accepted Answer

The answer of Fillmore's net Section 1231 gains and losses...

Question 13

Johnson Corporation's 2016 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 2016 taxable income?

Accepted Answer

The answer of Johnson Corporation's 2016 business operating income is...

Question 14

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...

Question 15

"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 is done when the equipment is sold or disposed of, and the amount of depreciation taken in prior years exceeds the cost basis of the asset. In such a scenario, the excess amount is taxed as ordinary income, which is known as recapture of depreciation.

Question 16

Benson Company purchased a drill press on November 13,2012,at a cost of $30,000.Benson sells the drill press on January 3,2016,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 regular MACRS depreciation, the adjusted basis would be $11,500 ($30,000 - $18,500), resulting in a Section 1245 ordinary income of $4,500 ($16,000 - $11,500). If straight-line depreciation was used, the adjusted basis would be $18,000 ($30,000 - $12,000), resulting in a Section 1231 loss of $2,000 ($16,000 - $18,000).

Question 17

During 2016,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

To net the Section 1231 gain and loss, we subtract the loss from the gain:
$10,000 - $25,000 = ($15,000) Section 1231 loss

This loss is then netted with the ordinary income:
$20,000 - $15,000 = $5,000 ordinary income.

Therefore, the result of netting these items is $5,000 of ordinary income.

Question 18

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 the depreciation method is straight-line, the entire $400,000 cost basis is subject to depreciation. After two years, the accumulated depreciation would be $24,868 x 2 = $49,736. Thus, the adjusted basis of the warehouse would be $400,000 - $49,736 = $350,264 at the beginning of the third year. 
Since Marybelle sold the warehouse for $380,000, she realized a gain of $29,736 ($380,000 - $350,264). This gain is considered an unrecaptured section 1250 gain because it relates to depreciation deductions that were subject to a maximum 25% rate (section 1250) rather than the usual 20% rate for long-term capital gains. Therefore, the correct answer is (D) Unrecaptured section 1250 gain.

Question 19

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 answer of Dallas Wildcat Drilling Co.sells an oil-drilling rig...

Question 20

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.

Quiz 11: Property Dispositions

In 2013,Jim had a $5,000 net Section 1231 gain.In 2015,Jim reported a Section 1231 loss of $12,000.In 2016,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2016.What is Jim's ordinary income from his 2016 property transactions?

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

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.

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2016.Before 2016,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2012.How should Ramona report her 2016 transactions?

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?

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

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. In 2016,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2016 as a result of this net Section 1231 gain?

Johnson Corporation's 2016 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 2016 taxable income?

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?

"Recapture of depreciation" refers to:

During 2016,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?

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.

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?

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?

Quiz 11: Property Dispositions

In 2013,Jim had a $5,000 net Section 1231 gain.In 2015,Jim reported a Section 1231 loss of $12,000.In 2016,Jim has a $15,000 net Section 1231 gain.He had no other sales of property in 2016.What is Jim's ordinary income from his 2016 property transactions?

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

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. ​

Ramona recognizes a $50,000 Section 1231 loss,a $30,000 Section 1231 gain,and ordinary income of $35,000 in 2016.Before 2016,Ramona's only Section 1231 transaction was a $15,000 loss reported in 2012.How should Ramona report her 2016 transactions?

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?

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

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. ​ In 2016,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2016 as a result of this net Section 1231 gain?

Johnson Corporation's 2016 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 2016 taxable income?

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?

"Recapture of depreciation" refers to:

During 2016,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?

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.

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?

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?

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

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.

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

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below. In 2016,Fillmore has a $15,000 net Section 1231 gain.What amounts and character of income will Fillmore ultimately report in 2016 as a result of this net Section 1231 gain?