Question 1

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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

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 2

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 $380,000. How much of the gain is recaptured as Section 1250 ordinary income?
A)$- 0 -
B)$4,868
C)$24,868
D)$380,000
E)$400,000

Accepted Answer

Under Section 1250, there is no recapture of gain as ordinary income for real property depreciated using the straight-line method. Since Elizabeth used straight-line depreciation, there is no Section 1250 recapture.

Question 3

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.
A)Long-term capital gain.
B)Section 1250 gain.
C)Ordinary income.
D)Unrecaptured section 1250 gain.
E)Section 1245 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 4

In 2015, Jim had a $5,000 net Section 1231 gain. In 2017, Jim reported a Section 1231 loss of $12,000. In 2018, Jim has a $15,000 net Section 1231 gain. He had no other sales of property in 2018. What is Jim's ordinary income from his 2018 property transactions?
A)$- 0 -
B)$7,000
C)$3,000
D)$12,000
E)$15,000

Accepted Answer

The answer of In 2015, Jim had a $5,000 net...

Question 5

During 2018, 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?
A)$5,000 capital loss.
B)$5,000 Section 1231 gain.
C)$5,000 ordinary income.
D)$17,000 ordinary income and $12,000 capital loss.
E)$20,000 ordinary income and $15,000 capital loss.

Accepted Answer

The answer of During 2018, Ester recognizes a $10,000 Section...

Question 6

Johnson Corporation's 2018 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 2018 taxable income?
A)$195,000
B)$198,000
C)$200,000
D)$203,000
E)$211,000

Accepted Answer

The answer of Johnson Corporation's 2018 business operating income is...

Question 7

"Recapture of depreciation" refers to:
A)Downward adjustments of past depreciation charges by IRS review.
B)Increasing depreciation charges by changing accounting method.
C)Filing an amended return where less than maximum depreciation charges have been claimed as deductions.
D)Taxing the smaller of past depreciation or gain as ordinary income on the disposition of equipment.

Accepted Answer

Recapture of depreciation involves taxing the smaller of past depreciation or gain as ordinary income upon the sale or disposition of an asset. This process ensures that the tax benefits received from depreciation deductions are adjusted if the asset is sold for a gain.

Question 8

Unrecaptured Section 1250 gain
I.is subject to a maximum tax rate of 25%.
II.applies only to real property owned by individuals.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

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

Question 9

Troy Company purchased a printing press on April 13, 2015 at a cost of $30,000. Troy sells the printing press on January 3, 2018 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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

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 ($16,000 - $18,000). If regular MACRS depreciation is used, 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

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 $180,000. Which of the following correctly states the character of the gain from the sale of the property?
A)$ 50,000 ordinary gain.
B)$ 50,000 Section 1231 gain.
C)$ 30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.
D)$ 20,000 Section 1231 gain and $30,000 Section 1250 ordinary income.
E)$150,000 Section 1231 gain and $20,000 Section 1250 ordinary gain.

Accepted Answer

The first step is to calculate the adjusted basis of the property:
Cost = $675,000
Less: Accelerated depreciation = $200,000
Adjusted Basis = $475,000

The selling price of $525,000 exceeds the adjusted basis of $475,000, resulting in a gain of $50,000.

However, since the property was used in the taxpayer's trade or business, the gain is treated as Section 1231 gain.

Since the property was subject to accelerated depreciation, a portion of the gain will be treated as ordinary income under Section 1250. The amount of ordinary income is equal to the lesser of the accelerated depreciation taken ($200,000) or the gain recognized ($50,000). Therefore, $30,000 of the gain will be treated as Section 1231 gain and $20,000 will be treated as Section 1250 ordinary income.

Therefore, the correct answer is C.

Question 11

Depreciation recapture provisions
I.are reclassification provisions.
II.apply to depreciable assets sold at a gain.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

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

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?
A)Such losses are not deductible.
B)Such losses are deducted as ordinary losses.
C)Such losses are deducted as long-term capital losses.
D)Such losses are deductible as short-term capital losses.
E)Such losses are deducted as ordinary losses only to the extent that the business activity produces other ordinary net income.

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 13

Dallas Wildcat Drilling Co. sells an oil-drilling rig for $3,000,000. The drilling rig was purchased in 2012 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?
A)$2,200,000 Section 1245 ordinary income.
B)$2,200,000 long-term capital gain.
C)$1,200,000 Section 1245 ordinary income, $1,000,000 Sec 1231 gain.
D)$1,200,000 Section 1245 ordinary income, $1,000,000 long-term capital gain.

Accepted Answer

The gain is calculated as the difference between the sale price ($3,000,000) and the adjusted basis (original cost of $2,000,000 minus depreciation of $1,200,000, which equals $800,000), resulting in a total gain of $2,200,000. The depreciation recapture of $1,200,000 is treated as ordinary income under Section 1245, and the remaining gain of $1,000,000 is treated as Section 1231 gain, which can be taxed as long-term capital gain if the asset was held for more than one year.

Question 14

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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Accepted Answer

Unrecaptured Section 1250 gain only applies to real property that is not Section 1245 property, meaning statement II is correct, while statement I is incorrect as it includes corporations, which do not have depreciation recapture rules for real estate.

Question 15

Benson Company purchased a drill press on November 13, 2014, at a cost of $30,000. Benson sells the drill press on January 3, 2018, 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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I and II are correct.
D)Statements I and IV are correct.
E)Statements II and III are correct.

Accepted Answer

The gain or loss is calculated by comparing the sale price to the adjusted basis. Under regular MACRS, the adjusted basis is $11,500 ($30,000 - $18,500), resulting in a $4,500 gain ($16,000 - $11,500), which is Section 1245 ordinary income. Under straight-line, the adjusted basis is $18,000 ($30,000 - $12,000), resulting in a $2,000 loss ($16,000 - $18,000), which is a Section 1231 loss.

Question 16

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 $190,000. How much of the gain is recaptured under Section 1245 as ordinary income?
A)$- 0 -
B)$5,500
C)$22,000
D)$27,500
E)$37,500

Accepted Answer

First, we need to find the adjusted basis of the equipment at the beginning of the third year, which is the original cost minus the total MACRS deductions taken:
$200,000 - $37,500 - $37,500 = $125,000 adjusted basis

Next, we need to find the amount of gain on the sale of the equipment:
Sale price - adjusted basis = gain
$190,000 - $125,000 = $65,000 gain

Since the equipment was used for business purposes, the gain is subject to recapture under Section 1245 as ordinary income. The recaptured amount is the lesser of the gain or the total amount of MACRS deductions taken. In this case, the recaptured amount is $27,500 ($37,500 + $0 - $10,000 because the gain is less than the remaining amount). Therefore, the answer is D) $27,500.

Question 17

Ramona recognizes a $50,000 Section 1231 loss, a $30,000 Section 1231 gain, and ordinary income of $35,000 in 2018. Before 2018, Ramona's only Section 1231 transaction was a $15,000 loss reported in 2014. How should Ramona report her 2018 transactions?
A)$20,000 capital loss and $35,000 ordinary income.
B)$15,000 net Section 1231 gain.
C)$15,000 capital loss.
D)$15,000 ordinary income.
E)$15,000 capital gain.

Accepted Answer

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

Question 18

Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000. Allowable depreciation of $8,000 had been deducted as of the sale date. What is the amount and character of the gain or (loss) on the sale of the equipment?
A)$- 0 -
B)$3,000 Section 1245 ordinary income.
C)$8,000 Section 1245 ordinary income.
D)$3,000 long-term capital gain, and $8,000 Section 1245 ordinary income.
E)$3,000 long-term capital gain.

Accepted Answer

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

Question 19

George purchased a commercial building in 1999 for $900,000. During 2018, 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?
A)$200,000 Section 1250 ordinary income.
B)$50,000 Section 1250 ordinary income.
C)$50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250 gain.
D)$200,000 unrecaptured Section 1250 gain.

Accepted Answer

The building was sold for $700,000, which is less than its original cost of $900,000. Therefore, there is a loss on the sale. However, we need to calculate the character of the gain recognized. We start by comparing the actual accelerated depreciation taken with the straight-line depreciation that should have been taken.

The difference between accelerated and straight-line depreciation is $400,000 - $350,000 = $50,000. This amount represents depreciation that was taken in excess of what would have been taken under straight-line. This excess depreciation is treated as Section 1250 ordinary income.

The unrecaptured Section 1250 gain is the amount by which the depreciation actually taken exceeds the depreciation that would have been taken under straight-line. In this case, that amount is $50,000. The remaining $150,000 is treated as a capital loss.

Therefore, the gain recognized on the sale is $50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250 gain.

Question 20

Fillmore's net Section 1231 gains and losses reported for the past five years is presented below.
?
$$\begin{array} { r r } 
2013 & \$ 15,000 \
2014 & 12,000 \
2015 & 5,000 \
2016 & ( 28,000 ) \
2017 & ( 13,000 )
\end{array}$$
In 2018, Fillmore has a $15,000 net Section 1231 gain. What amounts and character of income will Fillmore ultimately report in 2018 as a result of this net Section 1231 gain?
A)$6,000 LTCG; $9,000 ordinary income
B)$15,000 ordinary income
C)$15,000 Section 1231 gain
D)$9,000 LTCG; $6,000 ordinary income
E)None of the above.

Accepted Answer

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

Quiz 11: Property Dispositions

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?

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.

In 2015, Jim had a $5,000 net Section 1231 gain. In 2017, Jim reported a Section 1231 loss of $12,000. In 2018, Jim has a $15,000 net Section 1231 gain. He had no other sales of property in 2018. What is Jim's ordinary income from his 2018 property transactions?

During 2018, 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?

Johnson Corporation's 2018 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 2018 taxable income?

"Recapture of depreciation" refers to:

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

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

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?

Dallas Wildcat Drilling Co. sells an oil-drilling rig for $3,000,000. The drilling rig was purchased in 2012 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?

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 2018. Before 2018, Ramona's only Section 1231 transaction was a $15,000 loss reported in 2014. How should Ramona report her 2018 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?

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

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