Question 1

The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.

Accepted Answer

False

Question 2

Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.

Accepted Answer

The Code section that defines "capital asset" only excludes certain items from the definition, but does not provide a comprehensive list of what is or isn't a capital gain or loss. Therefore, other Code sections must be consulted to determine the treatment of specific items as capital gains or losses.

Question 3

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Accepted Answer

This is because the tax law allows individuals to deduct up to $3,000 in net capital losses per year against other types of income, and any excess can be carried forward to future tax years. Separating capital gains and losses from other types of gains and losses makes it easier for individuals to calculate their net capital gains or losses and take advantage of these deductions.

Question 4

Original issue discount is amortized over the life of the bond.

Accepted Answer

Original issue discount refers to when a bond is issued at a price below its face value. The difference between the face value and the issue price is considered a discount that is amortized, or spread out, over the life of the bond. This means that each year, a portion of this discount is recognized as interest expense and added to the carrying value of the bond until it reaches its face value at maturity.

Question 5

To compute the holding period,start counting on the day the property was acquired and include the day of disposition.

Accepted Answer

The answer of To compute the holding period,start counting on...

Question 6

A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000.The taxpayer held the property for more than a year.The taxpayer has an $8,000 § 1231 loss.

Accepted Answer

The taxpayer has a § 1231 loss of $8,000, which means the loss can be treated as a long-term capital loss. Because the property was held for more than a year, the loss can offset any capital gains the taxpayer may have and can also be carried forward to offset future capital gains. In this case, the taxpayer's sale of the depreciable business property results in a capital loss of $8,000 ($40,000 adjusted basis - $32,000 sale price), which can be offset by the § 1231 loss.

Question 7

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating.The taxpayer immediately sells the note to a bank for less than the note's stated value.The taxpayer has a capital loss.

Accepted Answer

The answer of An accrual basis taxpayer accepts a note...

Question 8

An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter did not create the painting,but had purchased it from another artist.After the taxpayer held the painting for two years,he sold it for a $400,000 gain.The gain is a long-term capital gain.

Accepted Answer

The taxpayer held the painting for more than one year, making the gain a long-term capital gain. The fact that the painting was received as a gift and originally purchased by someone else does not affect the capital gain status.

Question 9

Individuals who are not professional real estate developers may get capital gain treatment for sale of their real property if they engage only in limited development activities.

Accepted Answer

According to the IRS, individuals who are not professional real estate developers may still qualify for capital gain treatment if they engage in limited development activities, such as subdividing a property into a few lots or improving the property with one or two homes. However, if the activity is considered to be a trade or business, then ordinary income tax rates would apply instead of capital gains rates.

Question 10

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

Accepted Answer

The subdivision of real property into lots for resale can cause the gain from the sale of the lots to be treated as ordinary income, especially if the activity is considered to be in the nature of a trade or business, such as a real estate dealer's activities, regardless of whether substantial physical improvements have been made.

Question 11

When a patent is transferred,the most common forms of payment received by the transferor are a lump sum and/or periodic payment.

Accepted Answer

This is true, as the transferor of a patent can choose to receive a one-time lump sum payment or periodic payments (such as royalties) from the transferee.

Question 12

If a capital asset is sold at a loss,the holding period is important.

Accepted Answer

The length of time a taxpayer holds a capital asset before selling it affects the tax treatment of any resulting gain or loss. If the asset is held for more than a year, it is considered a long-term capital gain or loss, subject to different tax rates than short-term gains or losses.

Question 13

A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.

Accepted Answer

The answer of A security that is a capital asset...

Question 14

A franchisor licenses its mode of business operation to a franchisee.

Accepted Answer

This is the basic definition of a franchise, where the franchisor provides the franchisee with the right to use their established business model, brand, and support system in exchange for certain fees and royalties.

Question 15

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

Accepted Answer

A lease cancellation payment is considered an exchange because it involves the termination of a capital asset (the lease) in exchange for a payment. The payment is typically taxable as a capital gain or loss.

Question 16

Tom has owned 40 shares of Orange Corporation stock for five years.He sells the stock short for a total of $1,100.One month later,he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600.Tom has a $500 short-term capital gain.

Accepted Answer

Tom sold the 40 shares he already owned, and then bought 40 shares back at a lower price to close the short sale. This resulted in a $500 gain, which is a short-term capital gain since the entire transaction occurred within one year.

Question 17

The only things that the grantee of an option may do with the option are exercise it or let it expire.

Accepted Answer

The answer of The only things that the grantee of...

Question 18

The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.

Accepted Answer

This is correct. The tax law allows for a lower tax rate on long-term capital gains, so it's essential to separate them from other types of gains and losses when calculating taxes. This helps ensure that taxpayers receive the appropriate tax treatment for their investment income.

Question 19

As a general rule,the sale or exchange of an option to buy or sell property results in capital gain or loss if the property subject to the option is (or would be)a capital asset in the hands of the option holder.

Accepted Answer

This is a correct statement based on the tax rules for options trading in the US. If the property subject to the option is considered a capital asset for the option holder, then any gain or loss resulting from the sale or exchange of the option will also be classified as a capital gain or loss.

Question 20

Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.

Accepted Answer

Lease cancellation payments are considered as income for the lessor and are taxable. They are considered as compensation for breaking the lease agreement and are deemed to be in lieu of rental payments, hence they are considered as ordinary income.

Quiz 16: Property Transactions: Capital Gains and Losses