Question 1

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

Question 2

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

Accepted Answer

The like-kind property to be received must be identified within 45 days of the initial exchange.

Question 3

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

Accepted Answer

In a like-kind exchange, boot refers to any property or cash that is not like-kind to the property being exchanged. Cash (A) and other property (B) are both considered boot. In addition, a mortgage given (C) is also considered boot because it is not like-kind to the property being exchanged. However, a mortgage received (D) is not considered boot because it is considered part of the financing of the exchanged property. Therefore, the correct answer is D.

Question 4

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

Accepted Answer

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

Question 5

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

Question 6

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

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 of the taxpayer's tax return, including extensions, whichever comes first.

Question 7

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?

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

Which of the following is not true regarding §1239?

Accepted Answer

§1239 applies to gains on sales of both depreciable property and non-residential real property, so option C is not true. Options A, B, and D are all true statements about §1239, and option E is irrelevant as it does not provide a statement to evaluate.

Question 10

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

Accepted Answer

The basis of the new property received in a like-kind exchange is equal to the adjusted basis of the old property, not the fair market value. This ensures that the taxpayer's total basis in the investment remains the same after the exchange.

Question 11

Why does §1250 recapture generally no longer apply?

Accepted Answer

The Tax Reform Act of 1986 changed the depreciation of real property to the straight-line method, which reduced the potential for large gains on the sale of real property and made §1250 recapture generally no longer apply.

Question 12

Which of the following is not an involuntary conversion?

Accepted Answer

A foreclosure doesn't qualify as an involuntary conversion.

Question 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

The §1231 look-back rule only applies when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior five years. This rule allows taxpayers to treat a current §1231 gain as long-term capital gain, rather than ordinary income, to the extent of any nonrecaptured §1231 losses from the prior five years. If there are no nonrecaptured losses, the current gain is treated as ordinary income. The look-back rule does not apply to §1231 losses.

Question 15

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

(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 16

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 answer of Ashburn reported a $105,000 net §1231 gain...

Question 17

When does unrecaptured §1250 gains apply?

Accepted Answer

Unrecaptured §1250 gains apply only when non-corporate taxpayers sell depreciable real property at a gain. This is because §1250 allows for a reduced capital gains rate on gains from the sale of depreciable real property, but any gain attributed to depreciation recapture under §1245 is taxed at ordinary income rates. Therefore, the unrecaptured §1250 gain is the portion of the gain that is subject to the reduced capital gains rate but is not attributed to §1245 recapture. The other statements in the options are either incorrect or incomplete.

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

The answer of Alpha sold machinery, which it used in...

Question 19

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

Question 20

Each of the following is true except for:

Accepted Answer

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

Quiz 11: Property Dispositions