Question 1

If § 1231 asset casualty gains and losses net to a gain,the gain is treated as a § 1231 loss.

Accepted Answer

If § 1231 asset casualty gains and losses net to a gain, the gain is treated as ordinary income, not as a § 1231 loss.

Question 2

Section 1231 property generally does not include notes receivable arising in the ordinary course of business.

Accepted Answer

Section 1231 property refers to depreciable assets (such as equipment and buildings) and real property (such as land and buildings). Notes receivable are not considered depreciable assets and therefore do not fall under Section 1231 property.

Question 3

A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of taxable income.

Accepted Answer

A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of adjusted gross income (AGI), not taxable income.

Question 4

Section 1231 property includes nonpersonal use property where casualty gains exceed casualty losses for the taxable year.

Accepted Answer

This statement is true. Section 1231 property is defined by the IRS as depreciable and real property used in a trade or business and held for longer than one year. If the casualty gains from a nonpersonal use property exceed the casualty losses for the taxable year, it falls under Section 1231 property.

Question 5

Nonrecaptured § 1231 losses from the six prior tax years may cause current year net § 1231 gain to be treated as ordinary income.

Accepted Answer

The answer of Nonrecaptured § 1231 losses from the six...

Question 6

If there is a net § 1231 loss,it is treated as a long-term capital loss.

Accepted Answer

The answer of If there is a net § 1231...

Question 7

Casualty gains and losses from nonpersonal use assets are netted against casualty gains and losses from personal use assets to determine the net casualty gain or loss.

Accepted Answer

Casualty gains and losses from nonpersonal use assets are not netted with those from personal use assets; they are treated separately for tax purposes.

Question 8

Rental use depreciable real estate held more than 15 months is an example of a § 1231 asset.

Accepted Answer

According to the IRS, rental use depreciable real estate held more than 15 months is classified as a § 1231 asset.

Question 9

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 10

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

Accepted Answer

This is true. Collectibles, such as art or antiques, are subject to a maximum alternative tax rate of 28% for long-term gains (assets held for more than one year). This is higher than the maximum tax rate of 20% for long-term capital gains on other types of investments.

Question 11

The Code contains two major depreciation recapture provisions-§§ 1243 and 1248.

Accepted Answer

The Code contains two major depreciation recapture provisions, which are §§ 1245 and 1250, not §§ 1243 and 1248.

Question 12

In the "General Procedure for § 1231 Computation: Step 2.§ 1231 Netting," if the gains exceed the losses,the net gain is offset by the "lookback" nonrecaptured § 1231 losses.

Accepted Answer

This is correct according to the general procedure for § 1231 computation, as outlined by the IRS. If there are net gains, they are offset by any nonrecaptured § 1231 losses from the previous five years, as part of the netting process.

Question 13

Section 1231 property generally includes certain intangible assets (such as patents and goodwill)that are developed by the taxpayer and that are not eligible for amortization,but are held for more than one year.

Accepted Answer

Section 1231 property generally includes depreciable property and real estate used in a trade or business and held for more than one year, but it does not typically include intangible assets like patents and goodwill.

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% net long-term capital gain.

Accepted Answer

This is true as per the tax rules in the United States. Short-term capital losses can first offset any 28% net long-term capital gains, before being applied to offset 25% or 0%/15% net long-term capital gains.

Question 15

Personal use property casualty gains and losses are not subject to the § 1231 rules.

Accepted Answer

Personal use property casualty gains and losses are not considered as trade or business property under § 1231 rules. Therefore, they are not subject to the rules that apply to trade and business property under § 1231.

Question 16

Section 1231 applies to the sale or exchange of business properties,but not to personal use activity casualties.

Accepted Answer

Section 1231 of the Internal Revenue Code deals with the sale or exchange of business properties, such as buildings, equipment, and vehicles. It does not apply to personal use activity casualties like a car accident or damage to a personal residence.

Question 17

An individual taxpayer with 2011 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2012.

Accepted Answer

This is correct per IRS rules. An individual taxpayer can deduct up to $3,000 in net short-term capital losses against their ordinary income and carry forward any excess to future years.

Question 18

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

Accepted Answer

This statement is false. Short-term capital gains are subject to ordinary income tax rates, while long-term capital gains are eligible for special tax rates depending on the taxpayer's income level.

Question 19

Section 1231 property generally does not include paintings of artistic value held by the creator.

Accepted Answer

Section 1231 property typically includes depreciable property used in a trade or business and held for more than one year, but it does not include inventory or property held primarily for sale to customers, such as paintings held by the creator.

Question 20

Involuntary conversion gains may not be deferred if the proceeds of the involuntary conversion are not reinvested.

Accepted Answer

This statement is true. Involuntary conversion gains refer to the capital gains that arise when property is converted involuntarily (i.e. due to theft, destruction, condemnation or eminent domain). Under US tax laws, taxpayers can defer paying taxes on such gains if they reinvest the proceeds in similar property. However, if they do not reinvest the proceeds or reinvest in dissimilar property, they may not be able to defer the gains.

Quiz 14: Property Transactions: Capital Gains and Losses