Question 1

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

Accepted Answer

The replacement property must be identified within 45 days.

Question 2

Which of the following is not true regarding §1239?

Accepted Answer

§1239 only applies to gains on sales of depreciable property between related taxpayers.

Question 3

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?

Accepted Answer

The exchange qualifies as a like-kind exchange. Since boot was given in the transaction, the fair market value of the boot given ($4,000) is added to the adjusted basis ($20,000) of the property given up.

Question 4

Why does §1250 recapture generally no longer apply?

Accepted Answer

§1250 only recaptures excess depreciation, the excess of accelerated over straight-line depreciation and depreciation taken on real property held one year or less.

Question 5

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?

Accepted Answer

The exchange qualifies as a like-kind exchange. Since no boot was transferred, Koch's basis in the new machine is the basis in its old machine.

Question 6

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

Accepted Answer

The look-back rule only recharacterizes a current year §1231 gain if there are §1231 losses from the prior 5 years.

Question 7

Each of the following is true except for:

Accepted Answer

Losses realized in an involuntary conversion are realized; while losses realized in a like-kind exchange are deferred.

Question 8

Which of the following is not an involuntary conversion?

Accepted Answer

A foreclosure doesn't qualify as an involuntary conversion.

Question 9

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: $$\begin{array} { | l | r | r | r | } 
\hline \text { Asset } & \begin{array} { r } 
\text { Original } \
\text { Cost }
\end{array} & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { GainLoss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Land } & 40,000 & 0 & 20,000 \
\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \
\hline
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

The net §1231 gain is $13,000 ($20,000 gain on land - $5,000 loss on building + $10,000 gain on machinery). The $10,000 gain on machinery is ordinary income due to depreciation recapture, leaving $3,000 as §1231 gain. The tax liability is calculated as $12,000 ordinary income at 35% ($4,200) plus $3,000 §1231 gain at 15% ($450), totaling $6,150.

Question 10

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?

Accepted Answer

The 1231 look-back rule recharacterizes $60,000 of the §1231 gain to ordinary income, the amount of the prior 5 years losses that received ordinary loss treatment.

Question 11

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

Accepted Answer

The general rule is that the property receives a carryover basis from the old property.

Question 12

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

Accepted Answer

Mortgage received is treated as transferring cash to the other party, and thus it is not boot to the recipient.

Question 13

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

Accepted Answer

Losses on boot, but not like-kind property, given are recognized currently.

Question 14

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

Accepted Answer

The receipt of cash in a transaction qualifies as boot and requires the recognition of gain.

Question 15

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?

Accepted Answer

The gain recognized is the lesser of the fair market value of the boot ($2,000 of office equipment) or realized gain of $9,000 ($35,000 fair market value plus $2,000 boot less $28,000 adjusted basis).

Question 16

When does unrecaptured §1250 gains apply?

Accepted Answer

Unrecaptured §1250 gain only applies to the lesser of realized gain or accumulated depreciation on sales of real property by non-corporate taxpayers.

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: $$\begin{array} { | l | r | r | r | } 
\hline \text { Asset } & \begin{array} { r } 
\text { Origina } \
\text { Cost }
\end{array} & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { GainLoss } \
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\hline \text { Computers } & 10,000 & 6,000 & ( 2,000 ) \
\hline \text { Building } & 90,000 & 20,000 & ( 2,000 ) \
\hline
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Accepted Answer

The gain from the sale of the machinery is $10,000, of which $7,000 is recaptured as ordinary income under §1245 (due to depreciation recapture), and the remaining $3,000 is a §1231 gain. The losses from the computers and building are §1231 losses totaling $4,000. The net §1231 gain is $3,000 - $4,000 = -$1,000, which is a net §1231 loss. Therefore, the total ordinary income is $7,000, and the tax liability is $7,000 * 35% = $2,450. However, the correct choice is B, which states $6,000 ordinary income and $2,100 tax liability, indicating a mistake in the problem setup or choices.

Question 18

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?

Accepted Answer

§1239 recharacterizes the entire gain as ordinary income when depreciable property is sold to a related person.

Question 19

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?

Accepted Answer

All of the assets are §1231 assets: automobile $2,000 gain, machinery $5,000 gain, furniture $1,000 loss, and equipment $9,000 loss. The gains on the automobile and machinery are characterized as ordinary income to the extent the gains were created by depreciation deductions. This results in $7,000 ordinary gain and $10,000 §1231 loss. The §1231 look-back rule only applies when there is a net 1231 gain.

Question 20

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

Accepted Answer

The exchange must be completed by the due date of the taxpayer's return including extensions.

Quiz 11: Property Dispositions