3.3 - Gains & Losses

Question 1

When a taxpayer disposes of property, the gain or loss recognized is classified as either:

Answer 1

Capital or ordinary

Question 2

Capital assets include property (real and personal) held by the taxpayer such as:

Answer 2

Personal automobile
Furniture and fixtures in the taxpayer’s home
Stocks and securities
Personal property not used in a trade or business
Real property not used in a trade or business
Copyrights, literary, musical, or artistic compositions that have been PURCHASED

Question 3

What is the basic formula to calculate gain or loss?

Answer 3

Amount realized - adjusted basis of asset sold = gain or loss

Question 4

The amount realized includes:

Answer 4

Cash received (boot/loot)
Assumption of debt by buyer (debt relief)
FMV of property received
FMV of services received
SUBTRACT OUT selling expenses

Question 5

A taxpayer conveys commercial property in which the taxpayer has a basis of $70,000 and which is subject to a mortgage of $45,000 to another party for $60,000 in cash. Determine the amount realized on the sale and the gain or loss realized.

Answer 5

45,000 mortgage releived + 60,000 cash received = 105,000 amount realized

105,000 - 70,000 basis = 35,000 realized gain

Question 6

What is the holing period and tax rates for long term property for individual tax payers?

Answer 6

Holding period = more than 1 year
Tax rate = dependent on the taxpayer’s taxable income and filing status (either 0%, 15%, or 20%)

Question 7

What is the holding period and tax rate for short term property for individual tax payers?

Answer 7

Holding period = less than 1 year
Tax rate = treated as ordinary income

Question 8

Any unrecognized section 1250 gain from depreciation of real property (for individuals) that is not treated as ordinary income is taxed how?

Answer 8

At a maximum rate of 25%

Question 9

Any long term gains on the sale of collectibles and section 1202 qualified small business stock (for individuals) is taxed how?

Answer 9

At a maximum rate of 28%

Question 10

What are the net capital loss deduction and loss carryover rules for individual taxpayers?

Answer 10

There is maximum $3,000 deduction per year
Any excess over that $3,000 deduction is carried forward forever until exhausted

Question 11

How are personal bad debts and worthless stock securities treated for individual taxpayers?

Answer 11

Bad debt = as a short term capital loss in the year the debt becomes worthless
Stock & securities = as a capital loss in the year they become worthless

Question 12

What do short sales result in? What is the holding period?

Answer 12

Result in a capital gain or loss
Holding period is based on the date the short sale is executed (NOT the closing date)

Question 13

What is the netting process for individuals?

Answer 13

Gains and losses are netted within each tax rate group and taxed as the following:
Short term ordinary tax rate group
Long term 0/15/20% tax group
Long term 25% tax rate group
Long term 28% tax rate group

Question 14

How are net capital gains treated/taxed for C Corporations?

Answer 14

There is no distinction between short term and long term capital gains and losses for C corporations. Gains are added to ordinary income and taxed at the regular tax rate.

Question 15

How are net capital losses treated/taxed for C Corporations?

Answer 15

Net capital losses may not be deducted from ordinary income. Losses are carried back 3 years and forward 5.

Question 16

Offset income or gains? Excess carry back? Excess carry forward?
Net operating losses
Individual capital losses
Corporate capital losses

Answer 16

NOL = Yes (80% limit) ; No ; Indefinitely
ICL = $3,000 limit ; No ; Indefinitely
CCL = No ; 3 years ; 5 years

Question 17

What assets are classified as a long-term trade or business use section 1231 asset?

Answer 17

Assets that are used in the taxpayers trade or business and held for more than 12 months

Question 18

If a taxpayer’s combined 1231 gains and losses for the year result in a net 1231 los, how is the loss treated?

Answer 18

Treated as ordinary income

Question 19

If a taxpayers combined 1231 gains and losses for the year result in a net 1231 gain, how is the gain treated?

Answer 19

Treated as a long term capital gain

C-Corps can use the capital gains to offset capital losses
Individuals capital gains are taxed at 0/15/20%

Question 20

If the taxpayer has a section 1231 gain for the year, what must the taxpayer first do before recording anything?

Answer 20

“Look back” to see if the were any net section 1231 losses deducted as ordinary losses during the previous 5 years and pay it back.

Question 21

A C Corporation purchased land that is used in its business for $100,000 in year 1. The corporation sold the land in year 7 for $150,000. The corporation had prior unrecaptured net section 1231 loss in year 3 of $30,000. The corporation had no other 1231 gains or losses in year 7 and no other prior net 1231 gains or losses. Calculate the amount and character of the gain recognized.

Answer 21

150,000 selling price - 100,000 cost = 50,000 gain

30,000 ordinary income (to cover the prior years loss)
20,000 long-term capital gain

Question 22

Section 1231 assets include what their type of assets?

Answer 22

Section 1245 depreciable personal property, section 1250 depreciable real property, and land

Question 23

What assets are included under the section 1245 assets?

Answer 23

Depreciable personal property used in a trade or business for more than 12 month (vehicles, computes, machinery, equipment)

Question 24

How are gains for section 1245 assets treated?

Answer 24

The lesser of the gain recognized or accumulated depreciation is recaptured as ordinary income and any remaining gain is a section 1245 gain

Question 25

A c corporation owned equipment used in its business with an original cost basis of $100,000 and accumulated depreciation of $30,000. The corporation sold the equipment after 2 years for $95,000. Calculate the amount and character of the gain recognized on the sale.

Answer 25

100,000 - 30,000 = 70,000 adjusted basis
95,000 - 70,000 = 25,000 gain

25,000 < 30,000; therefore gain recognized = 25,000

Question 26

What assets are included under the section 1250 assets?

Answer 26

Depreciable real property used in a trade or business for more than 12 months (warehouse, office building but NOT LAND)

Question 27

For C corporations, under section 291 under section 1250 assets, how are gains treated?

Answer 27

The amount of recaptured as ordinary income is equal to 20% of the lesser of the recognized Ian or the accumulated straight line depreciation. Any excess is a section 1231 gain.

Section 291 only applies to c corporations

Question 28

For individuals, under the section 1250 assets, how are gains treated?

Answer 28

Part or all of the gain may be taxed at the section 12500 gain rate of 25% (max)

Question 29

A c corporation owned a building used in its business with an original cost basis of $100,000 and straight line accumulated depreciation of $15,000. The corporation sold the building for $95,000. Calculate the amount and character of the gain recognized on the sale of the building.

Answer 29

100,000 cost - 15,000 depreciation = 85,000 adjusted basis
95,000 selling price - 85,000 = 10,000 gain

10,000 gain X 20% (section 291 tax rate) = 2,000 ordinary income
10,000 - 2,000 = 8,000 1231 gain

Question 30

A sole proprietorship (individual) owned a building with an original cost basis of $100,000 and straight line accumulated depreciation of $15,000. The corporation sold the building for $95,000. Calculate the amount and character of the gain recognized on the sale of the building.

Answer 30

100,000 - 15,000 = 85,000
95,000 - 85,000 = 10,000 1231 gain recognized

10,000 X 25% = 2,500 1250 taxed gain

Question 31

Robert’s printing inc. sold the following assets during the year:
Printing press - sold for $4,000. Accum. Depr. = 3,200. Adjusted basis = 3,600.
Photocopier - sold for $2,600. Accum. Depr. = 500. Adjusted basis = 2,000.
Delivery van - sold for $500. Accum. Depr. = 13,000. Adjusted basis = 2,000.

Calculate the gain or loss recognizes. Calculate the depreciation recapture. Determine the character f any remaining gain or loss.

Answer 31

1. 4,000 - 3,600 = 400 gain recognized
   2,600 - 2,000 = 600 gain recognized
   500 - 2,000 = 1,500 loss recognized
2. Printing press & photocopier are 1245 assets so the depreciation recapture =
   400 gain < 3,200 depreciation; therefore 400 ordinary income
   600 gain > 500 depreciation; therefore 500 ordinary income

3.
100 remaining 1231 gain from photocopier - 1,500 loss from van = 1,400 net 1231 loss that is deducted as ordinary income

Question 32

What are the simple rules of thumb for section 1245 personal property depreciation recapture?

Answer 32

Section 1231 loss = treated as ordinary loss
Ordinary income =gain to the extent of accumulated depreciation and net 1231 gain to the extend of unrecaptured net 1231 losses in previous 5 years
Capital gain = net section 1245 gain after depreciation recapture and 5 year look back

Question 33

What is the tax method of reporting gains (not losses) for sales made by a “non merchant” in personal property and “non dealer” in real estate when part of the payments are received in a tax year after the year of the sale?

Answer 33

Installment sale method

Question 34

What is the formula used to calculate the installment sale gain/income?

Answer 34

1. Sales price - adjusted basis = gross profit
2. Gross profit / sales price = gross profit percentage
3. Cash collections (excluding interest) X gross profit percentage = gain recognized (taxable income)

Question 35

Under the installment method, when is gain recognized?

Answer 35

When cash is received even if accrual basis financial statements

Question 36

A taxpayer had $400,000 in installment sales in year 1 and a December 31, year 1 balance in installment notes receivable of $150,000. The taxpayer had $300,000 as its adjusted basis. Calculate the gross profit, the gross profit percentage, and the gain recognized in year 1 under the installment method.

Answer 36

Gross profit = 400,000 - 300,000 = 100,000
Gross profit percentage = 100,000 / 400,000 = 25%
Gain recognized = 25% X (400,000 - 150,000) = 62,500