Question 1

Mary traded furniture used in her business to a furniture dealer for some new furniture. Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange. The new furniture had a fair market value of $40,000. Mary also gave $4,000 to the dealer in the transaction. What is Mary's adjusted basis in the new furniture after the exchange?
A) $20,000.
B) $24,000.
C) $36,000.
D)$40,000.
E)None of these

Accepted Answer

The answer of Mary traded furniture used in her business...

Question 2

Each of the following is true except for:
A) A direct involuntary conversion occurs when property taken under imminent domain is replaced with other property.
B) Qualified replacement property rules are more restrictive than the like-kind property rules.
C) An indirect involuntary conversion occurs when property is destroyed and insurance proceeds are used to purchase qualified replacement property.
D)Losses realized in involuntary conversions are deferred.
E)All of these are true

Accepted Answer

The answer of Each of the following is true except...

Question 3

Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery. Arlington originally purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at the time of the exchange. The new machinery had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's gain or loss recognized on the exchange?
A) $0.
B) $2,000.
C) $7,000.
D)$9,000.
E)None of these

Accepted Answer

The answer of Arlington LLC traded machinery used in its...

Question 4

How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange?
A) The like-kind property to be received must be identified within 45 days.
B) The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year.
C) The like-kind property to be received must be identified within 180 days.
D)There is no deadline for the identification of replacement property.
E)All of these

Accepted Answer

According to the Internal Revenue Code, a taxpayer must identify the like-kind property to be received within 45 days of the initial exchange.

Question 5

Which of the following is not an involuntary conversion?
A) Destruction caused by a hurricane.
B) Imminent domain.
C) A foreclosure.
D)Fire damage.
E)All of these are involuntary conversions.

Accepted Answer

A foreclosure is not considered an involuntary conversion because it is a result of the borrower's failure to make mortgage payments and is therefore a voluntary act. The other options (destruction caused by a hurricane, imminent domain, fire damage) are all examples of involuntary conversions where property is taken or destroyed without the owner's consent.

Question 6

Koch traded machine 1 for machine 2. Koch originally purchased machine 1 for $75,000 and machine 1's adjusted basis was $40,000 at the time of the exchange. Machine 2's seller purchased it for $65,000 and machine 2's adjusted basis was $55,000 at the time of the exchange. What is Koch's adjusted basis in machine 2 after the exchange?
A) $40,000.
B) $50,000.
C) $55,000.
D)$75,000.
E)None of these

Accepted Answer

The answer of Koch traded machine 1 for machine 2....

Question 7

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?
A) To facilitate finding replacement property.
B) To help acquire the replacement property.
C) To prevent the seller from receiving cash (boot) that will taint the transaction.
D)To certify the taxpayer's Form 8824.
E)All of these

Accepted Answer

The answer of What is the primary purpose of a...

Question 8

Ashburn reported a $105,000 net §1231 gain in year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during years 1-5, what amount of Ashburn's net §1231 gain for year 6, if any, is treated as ordinary income?
A) $0.
B) $45,000.
C) $60,000.
D)$105,000.
E)None of these

Accepted Answer

According to the §1231 recapture rule, if a taxpayer has net §1231 gains for the year, such gains are classified as long-term capital gains. However, if the taxpayer has nonrecaptured net §1231 losses in prior years, the current year gains up to the amount of the prior year's losses are classified as ordinary income. In this case, Ashburn had $60,000 of nonrecaptured §1231 losses in years 1-5. Therefore, the first $60,000 of the $105,000 net §1231 gain in year 6 is treated as ordinary income, and the remaining $45,000 is treated as long-term capital gain.

Question 9

Which of the following is not true regarding §1239?
A) It only applies to related taxpayers.
B) It only applies to gains on sales of depreciable property.
C) It only applies to gains on sales of non-residential real property.
D)It does not apply to losses.
E)None of these

Accepted Answer

§1239 applies to gains on sales of depreciable property between related taxpayers, but it is not limited to non-residential real property. Choice A and D are also incorrect as the section only applies to related taxpayers and gains, not losses. Therefore, the correct answer is C.

Question 10

Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?
A) $3,000 ordinary loss, $0 §1231 loss.
B) $7,000 ordinary gain, $10,000 §1231 loss.
C) $7,000 ordinary loss, $4,000 §1231 gain.
D)$1,000 ordinary gain, $4,000 §1231 loss.
E)None of these

Accepted Answer

(1) Automobile: $12,000 loss, treated as ordinary loss.
(2) Machinery: $5,000 loss (proceeds $10,000 - adjusted basis $20,000), treated as §1231 loss.
(3) Furniture: $6,000 loss, treated as ordinary loss.
(4) Computer equipment: $19,000 gain (proceeds $10,000 - adjusted basis $6,000 - unrecaptured losses $3,000), treated as §1231 gain.
Total gains and losses before the 1231 netting process:
Ordinary loss: $18,000
Ordinary gain: $19,000
§1231 loss: $10,000
§1231 gain: $19,000 - $3,000 = $16,000
Therefore, the best choice is (B) $7,000 ordinary gain, $10,000 §1231 loss.

Question 11

Which one of the following is not considered boot in a like-kind exchange?
A) Cash.
B) Other property.
C) Mortgage given.
D)Mortgage received.
E)All of these

Accepted Answer

The answer of Which one of the following is not...

Question 12

The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:
A) The basis is equal to the fair market value of the new property.
B) The basis is equal to the fair market value of the old property.
C) The basis is equal to the adjusted basis of the old property.
D)The basis is equal to the cost basis of the old property.
E)All of these

Accepted Answer

The basis of the new property received in a like-kind exchange is generally equal to the adjusted basis of the old property. This means that if the old property had depreciation or other adjustments to the basis, the new property will also have the same basis as the old property. This is important for calculating depreciation and gain or loss on the new property if it is sold in the future.

Question 13

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?
A) $20,000 ordinary income under §1239.
B) $10,000 ordinary gain and $10,000 §1231 gain.
C) $20,000 ordinary gain.
D)$20,000 capital gain.
E)None of these

Accepted Answer

When a related party sells property to another related party, the transaction may be subject to §1239, which treats gain or loss on the sale of depreciable property as ordinary income or loss. In this case, Alpha has a $10,000 gain ($40,000 selling price - $30,000 adjusted basis). Since the transaction is between related parties, the gain is treated as ordinary income under §1239.

Question 14

Which of the following is true regarding the §1231 look-back rule?
A) It only applies when a §1231 loss occurs.
B) It only applies when a §1231 gain occurs.
C) It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years.
D)It only applies when a §1231 gain occurs and there is a nonrecaptured §1231 gain in the prior five years.
E)None of these

Accepted Answer

The §1231 look-back rule applies when there is a §1231 gain and there has been a nonrecaptured §1231 loss in any of the prior five years. This rule is designed to prevent taxpayers from artificially converting ordinary income into capital gain by alternating between §1231 gains and losses. Therefore, option C is the correct answer.

Question 15

When does unrecaptured §1250 gains apply?
A) When the taxpayer makes the election.
B) It applies only when non-corporate taxpayers sell depreciable real property at a gain.
C) It applies when §1245 recapture trumps §1250 recapture.
D)It applies only when real property purchased before 1986 is sold at a gain.
E)None of these

Accepted Answer

Unrecaptured §1250 gains apply only when non-corporate taxpayers sell depreciable real property at a gain. The other options are either incorrect or do not describe the situation in which unrecaptured §1250 gains apply.

Question 16

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets:
Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?
$$\begin{array} { | l | r | r | r | } 
\hline \text { Asset } & \begin{array} { r } 
\text { Original } \
\text { Cost }
\end{array} & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { Gain/Loss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Land } & 40,000 & 0 & 20,000 \
\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \
\hline
\end{array}$$
A) $25,000 ordinary income, $8,750 tax liability.
B) $25,000 §1231 gain and $3,750 tax liability.
C) $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability.
D)$12,000 §1231 gain, $13,000 ordinary income, and $6,350 tax liability.
E)None of these

Accepted Answer

Brandon has sold both §1231 assets with a gain of $13,000 and business assets with a gain of $12,000. The §1231 gain of $13,000 is subject to long-term capital gains tax rates, which are lower than ordinary income tax rates. Thus, the taxable gain under §1231 is limited to $2,000 ($13,000 - $5,000). The remaining $10,000 gain is subject to ordinary income tax rates, resulting in an ordinary income tax liability of $3,500 ($10,000 x 35 percent). Therefore, Brandon's total tax liability is $6,150 ($3,750 + $2,400).

Question 17

Brandon, an individual, began business four years ago and has never sold a §1231 asset. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets:
Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?
$$\begin{array} { | l | r | r | r | } 
\hline \text { Asset } & \begin{array} { r } 
\text { Origina } \
\text { Cost }
\end{array} & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { GainLoss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Computers } & 10,000 & 6,000 & ( 2,000 ) \
\hline \text { Building } & 90,000 & 20,000 & ( 2,000 ) \
\hline
\end{array}$$
A) $7,000 ordinary income, $1,000 §1231 loss and $2,100 tax liability.
B) $6,000 ordinary income and $2,100 tax liability.
C) $7,000 §1231 gain and $2,450 tax liability.
D)$7,000 §1231 gain and $1,050 tax liability.
E)None of these

Accepted Answer

The answer of Brandon, an individual, began business four years...

Question 18

Which one of the following is not true regarding a like-kind exchange?
A) Loss on like-kind property is not recognized.
B) Gains on boot given are deferred.
C) Losses on boot given are not recognized.
D)Securities can be like-kind with any other securities.
E)All of these

Accepted Answer

The answer of Which one of the following is not...

Question 19

Which one of the following is not a requirement of a deferred like-kind exchange?
A) The like-kind property to be received must be identified within 45 days.
B) The exchange must be completed within the taxable year.
C) The like-kind property must be received within 180 days.
D)A third party intermediary is often used to facilitate the exchange.
E)All of these

Accepted Answer

The requirement that the exchange must be completed within the taxable year is not accurate. The exchange must be completed within 180 days after the transfer of the relinquished property or the due date (with extensions) of the tax return for the year in which the transfer occurred, whichever is earlier.

Question 20

Why does §1250 recapture generally no longer apply?
A) Congress repealed the code section.
B) The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method.
C) §1245 recapture trumps §1250 recapture.
D)Because unrecaptured §1250 gains now apply to all taxpayers instead.
E)None of these

Accepted Answer

The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method, which reduced the potential for a significant gain on the sale of property and eliminated the need for §1250 recapture in most cases.

Quiz 3: Property Dispositions

Each of the following is true except for:

How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange?

Which of the following is not an involuntary conversion?

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?

Ashburn reported a $105,000 net §1231 gain in year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during years 1-5, what amount of Ashburn's net §1231 gain for year 6, if any, is treated as ordinary income?

Which of the following is not true regarding §1239?

Which one of the following is not considered boot in a like-kind exchange?

The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

Which of the following is true regarding the §1231 look-back rule?

When does unrecaptured §1250 gains apply?

Which one of the following is not true regarding a like-kind exchange?

Which one of the following is not a requirement of a deferred like-kind exchange?

Why does §1250 recapture generally no longer apply?