Question 1

Heidi invested in a mid-sized local company with gross assets of $17,000,000. Heidi purchased 2,000 shares for $44,000 in 1999. In 2015, Heidi sold the stock for $84,000. How is the gain treated for tax purposes?

Accepted Answer

The answer of Heidi invested in a mid-sized local company...

Question 2

Jeannie purchased 1,000 shares in Course Developers for $10,000 on August 11, 2014. The company went bankrupt on May 11, 2015 with no hope of recovery for the shareholders. On what date is the stock deemed to be worthless and what is the nature of the loss?

Accepted Answer

The stock is deemed worthless at the end of the year in which the company went bankrupt, which is December 31, 2015. Since Jeannie held the stock for more than one year, it is considered a long-term loss.

Question 3

Which of the following statements is correct regarding the sale of ordinary assets as discussed in this chapter?

Accepted Answer

According to the discussion in the chapter, the sale of an asset held less than a year outside the normal course of a trade or business is considered to be a sale of an ordinary asset. The other options given are incorrect.

Question 4

In 2015, Linda gave her son, Jonathan 425 shares of School Products Inc., common stock. Linda paid $8,350 for the stock in 2009. At the date of the gift, the FMV of the stock was $5,800. Assuming that there is no gift tax paid, if Jonathan sells the stock for $5,000, he will recognize:

Accepted Answer

Jonathan's basis for determining loss is the lower of the donor's adjusted basis ($8,350) or the fair market value at the time of the gift ($5,800). Since he sells the stock for $5,000, he recognizes a loss of $800 ($5,800 - $5,000).

Question 5

Otis bought a 2-unit apartment building in July 2008 for $330,000 and sold it for $400,000 on December 20, 2015. At the time of sale there was $83,493 of accumulated straight-line depreciation on the apartment building. Assuming Otis is in the 33% tax bracket, how much of the gain will be taxed at 25%?

Accepted Answer

The adjusted basis of the apartment building is $330,000 - $83,493 = $246,507. The total gain on the sale is $400,000 - $246,507 = $153,493. Otis must pay a 25% tax on the amount of gain that is attributable to the accumulated depreciation, which is $83,493. Therefore, the answer is (C) $83,493.

Question 6

Wyatt sold 300 shares of Clothes and More Inc., in 2015 for $30,000. Wyatt's investment portfolio includes the following purchases of Clothes and More Inc., stock:  Assuming Wyatt does not identify which shares he sold, he will recognize a(an)

Accepted Answer

The answer of Wyatt sold 300 shares of Clothes and...

Question 7

Demetrius had a $4,000 short-term loss and a $3,000 long-term gain from a collectible, a $2,000 gain from Section 1250 unrecaptured property. What is the netting effect of these gains and losses on his 1040?

Accepted Answer

According to the IRS rules, collectible losses are always offset against collectible gains first, regardless of the holding period. Therefore, the $4,000 short-term loss is offset against the $3,000 collectible first, leaving a remaining $1,000 short-term loss that is offset against the $2,000 Section 1250 property gain. The remaining $1,000 gain ($2,000 gain - $1,000 loss) is taxed at the applicable tax rate of 25%.

Question 8

Sammy sells a piece of specialized equipment (with a high resale value) used in his business for $41,650 on September 10, 2015. The equipment was purchased on May 20, 2012 for $32,000. Sammy has taken $9,200 of depreciation on the equipment. What are the amount and classification of the gain on the sale by Sammy?

Accepted Answer

The gain on the sale is calculated as the sale price ($41,650) minus the adjusted basis ($32,000 - $9,200 depreciation = $22,800), resulting in a total gain of $18,850. Under Section 1245, the depreciation recapture amount of $9,200 is treated as ordinary income, and the remaining gain of $9,650 is treated as a Section 1231 gain.

Question 9

Greg sold some equipment for $72,510 on June 13, 2015. Greg had originally purchased the equipment for $86,750 on November 21, 2014. The equipment was subject to depreciation of $17,350. What gain or loss will Greg recognize on the sale?

Accepted Answer

The gain or loss is calculated as the selling price minus the adjusted basis (original cost minus depreciation). The adjusted basis is $86,750 - $17,350 = $69,400. The gain is $72,510 - $69,400 = $3,110. Since the equipment is a business asset, the gain is considered ordinary.

Question 10

In 2010, Terri purchased 260 shares of Flowers R Us stock at a cost of $9,600 as an investment. In 2015, when the fair market value was $11,400, Terri gave the stock to her daughter, Michele. Assuming no gift tax was paid, if Michele sells the stock for $13,800, she will recognize:

Accepted Answer

Michele's basis in the stock is the same as Terri's original cost basis of $9,600 because no gift tax was paid. When Michele sells the stock for $13,800, her gain is calculated as the selling price ($13,800) minus her basis ($9,600), resulting in a gain of $4,200.

Question 11

Gabriella, a single taxpayer, has wage income of $160,000. In addition, she has $7,000 in long-term capital losses, $1,000 in long-term capital gains, $3,000 in short-term capital gains, and $1,000 in short-term losses. What is Gabriella's AGI for 2015?

Accepted Answer

AGI = Wage income + Net capital gain/loss
Net capital gain/loss = (long-term gains - long-term losses) + (short-term gains - short-term losses)
Net capital gain/loss = ($1,000 - $7,000) + ($3,000 - $1,000) = -$4,000
AGI = $160,000 - $4,000 = $156,000
Therefore, the answer is B) $157,000.

Question 12

Keiko sells a piece of equipment used in her business for $14,853 on August 10, 2015. The equipment was purchased on January 4, 2014 at a cost of $12,849. Keiko has taken $3,855 of depreciation on the equipment. What is the amount and classification of the gain on the sale by Keiko?

Accepted Answer

The gain on the sale is calculated as the selling price minus the adjusted basis. The adjusted basis is calculated as the original cost minus accumulated depreciation. 
Adjusted basis = $12,849 - $3,855 = $8,994
Gain = $14,853 - $8,994 = $5,859
Since the equipment is classified as Section 1245 property (depreciable personal property), $3,855 of the gain is treated as ordinary income under Section 1245 (the amount of depreciation taken). The remaining $2,004 is a Section 1231 gain (the difference between the selling price and the adjusted basis) and can be treated as either ordinary income or capital gain depending on the taxpayer's overall gain/loss on Section 1231 property for the year.

Question 13

Jack purchased 100 shares of Ford stock on April 22, 2014. If he sells the stock on April 21, 2015, what is the character of the sale?

Accepted Answer

The stock was held for less than one year, so it is considered a short-term transaction, which does not qualify for preferential tax treatment.

Question 14

Tamiko buys a painting from a collector for resale in her gallery for $3,500. She sold it 15 months later for $5,500. What are the nature and amount of the gain on the sale of the painting?

Accepted Answer

The answer of Tamiko buys a painting from a collector...

Question 15

Leslie buys a sculpture from a collector for resale in her gallery. She purchased the sculpture for $5,000 and sold it 24 months later for $9,000. What are the nature and the amount of the gain on the sale?

Accepted Answer

Since Leslie bought the sculpture for resale in her gallery, it is considered inventory for her business. When she sold it, she realized a $4,000 profit, which is ordinary income subject to ordinary income tax rates. None of the other choices are applicable in this situation.

Question 16

In 2015, Carmen had a net capital loss of $10,000 and taxable income of $100,000. What is Carmen's loss carryforward to 2016?

Accepted Answer

When an individual has a net capital loss, they can use it to offset capital gains and up to $3,000 of ordinary income. Any excess capital loss can be carried forward to future tax years. In this case, since Carmen had taxable income of $100,000, she can use the $10,000 net capital loss to offset any capital gains she has and up to $3,000 of ordinary income in 2015. This means that $7,000 of the net capital loss will be carried forward to 2016, as $3,000 is used to offset ordinary income in 2015. Therefore, the answer is D) $7,000.

Question 17

Aneta sold an apartment building for $713,470 in 2015. She purchased the building in 2009 for $600,000 and has taken $151,806 in depreciation on the building. Assuming Aneta is in the 33% tax bracket, how is her gain taxed?

Accepted Answer

To calculate Aneta's gain, we need to subtract the purchase price and depreciation from the selling price:

$713,470 - $600,000 - $151,806 = $(38,336)

This means that Aneta has a loss on the sale of the building, and will not owe any taxes on the transaction. Therefore, neither A, B, nor C are correct.

Option D is the only choice left, but it is not applicable in this situation, since Aneta has a loss, not a gain.

Question 18

Samson purchased some equipment for $86,749 on March 15, 2014. He decided he did not need the equipment and sold it on March 10, 2015 for $82,000. The equipment was subject to depreciation of $16,851 for 2014 and 2015. What gain or loss will Samson recognize on the sale of the equipment?

Accepted Answer

The answer of Samson purchased some equipment for $86,749 on...

Question 19

In 2012, Joe purchased land for $73,500 for use in his business. He sold it in 2015 for $100,000. What is the gain on the sale before any netting?

Accepted Answer

Section 1231 of the Internal Revenue Code applies to gains and losses from the sale or exchange of property used in a trade or business. Since Joe purchased the land for use in his business, it qualifies as Section 1231 property. The gain on the sale, calculated as selling price minus the purchase price, is $100,000 - $73,500 = $26,500. Since it is a gain on Section 1231 property, it is classified as a Section 1231 gain.

Question 20

Yolanda, a single taxpayer, has W-2 income of $87,500. She also has a short-term capital loss of $7,000, a short-term capital gain of $1,000, and a long-term capital gain of $2,000. What is Yolanda's AGI for 2015?

Accepted Answer

Yolanda's AGI is calculated by subtracting the net capital loss from her W-2 income. The net capital loss is $6,000 ($7,000 loss - $1,000 gain). Since only $3,000 of capital loss can be deducted against ordinary income per year, her AGI is $87,500 - $3,000 = $84,500.

Quiz 7: Capital Gains and Other Sales of Property