8 Adjustments to basis and cap gaing losses Flashcards
A taxpayer determines that he has both a short term capital loss of $2000 and nontaxable distribution of $1000 from intvestment. the following statms are correct except?
A The basis of the investment is reduced by the non-taxable distribution
B Non-taxable distribution is a return on capital
C The short tem capital loss can be offset capital gains (if any) for the year
D Any unused short tem capital loss me be carried back three years
D is incorrect
Any unused short tem capital loss can be carried forward until use up.
Karen Smith bought Coca-Cola stock for $475 on March 31, 2016. On November 15, 2016, Karen received a non-taxable distribution of $155 on the 50 shares of stock she owned. She sold the stock for $300 on December 22, 2016. What is her gain or loss on the sale?
A. $175 gain.
B. $20 loss.
C. $175 loss.
D. $20 gain.
B. $20 loss.
Answer (B) is correct.
Since the distribution is nontaxable, it is considered a return of capital that reduces the basis of the stock. The basis of the stock cannot be decreased below zero. Karen’s basis in the stock is reduced because of the distribution from $475 to $320 ($475 – $155 distribution). When it is sold for $300, the recognition of a $20 loss occurs ($300 realized – $320 adjusted basis).
A decrease to basis may result from a liability to the extent it is secured by real property and applied to extend its life.
T or F why
False.
FYour answer is correct.
An increase to basis may result from a liability to the extent it is secured by real property and applied to extend its life.
Distributions out of earnings and profits are dividends and therefore reduce basis.
T or F Why
False
Your answer is correct.
1.Distributions out of earnings and profits (E&P) are taxable as dividends.a.Dividends are taxable and therefore do not reduce basis.
2.When a corporation makes a distribution that is not out of E&P, it is a nontaxable return of capital (until basis is reduced to zero).
Basis for depreciation of personal-use property converted into business use is the FMV of the property at the conversion date.
T or F Why
F
Basis for depreciation of personal-use property converted into business use is the FMV of the property at the conversion date.
An individual shareholder should report capital gain distributions received from a mutual fund as short-term capital gains regardless of how long the individual has owned the stock in the mutual fund.
T or F Why
False
False.
Your answer is correct.
A capital gain dividend is a distribution by a regulated investment company (mutual fund) of capital gains realized from the sale of investments in the fund. Capital gain dividends are long-term regardless of how long the shareholder has owned the stock of the regulated investment compa ny
Sue received notice that her mutual fund had allocated a long-term capital gain to her account for the year in the amount of $5,000 and had paid federal tax on her behalf in the amount of $2,000 on the gain. No amount was to be paid to Sue on the gain, but it would be credited to her account. All of the following statements are false except
A. Sue will not report any gain because nothing was paid to her.
B. Sue is allowed a credit for the federal tax paid on her behalf of $2,000.
C. Sue will report a long-term capital gain of $3,000.
D. Sue will increase her basis in the stock by $5,000.
Sue is allowed a credit for the federal tax paid on her behalf of $2,000.
Answer (B) is correct.
A mutual fund is a regulated investment company, the taxation of which is determined by Sec. 852. Dividends paid by the mutual fund to shareholders are taxed. Undistributed capital gains must be included in income by shareholders, but a credit is allowed for their proportionate share of any tax on the capital gain paid by the mutual fund. Therefore, Sue must report the full $5,000 as a long-term capital gain and a credit of $2,000.
Sal owns a duplex. He lives in one half and rents out the other half at fair rental value. He wants to take out depreciation on the building, the appliances, and major remodeling in the bathroom on the rental side. Which depreciation periods may Sal use?
A. 27.5-year MACRS on both sides of the duplex, 7-year MACRS on the appliances and remodeling.
B. 27.5-year MACRS on the rental and remodeling, 5-year MACRS on the appliances, and no depreciation on the personal side.
C. 27.5-year MACRS on the rental side, no depreciation on the personal side, and 7-year MACRS on the appliances and remodeling.
D. 27.5-year MACRS on the whole building and 5-year MACRS on the appliances and the remodeling.
B
27.5-year MACRS on the rental and remodeling, 5-year MACRS on the appliances, and no depreciation on the personal side.
Answer (B) is correct.
Residential rental property and any additions or improvements to the property are depreciated over 27.5 years. Appliances are depreciated over 5 years. No depreciation is taken for personal residential property.
What is the individual’s net capital gain based on the following transactions?
Total short-term capital losses
$ 6,000
Total short-term capital gains
15,000
Total long-term capital losses
10,000
Total long-term capital gains
10,000
A. $9,000 net capital gain.
B. $22,000 net capital gain.
C. $25,000 net capital gain.
D. $0 net capital gain.
D. $0 net capital gain.
Answer (D) is correct.
For individuals, net capital gain (NCG) is the excess of net LTCG over net STCL. Net STCG is not included in NCG. Under Sec. 1222(11), the term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.
Net LTCG/L = $0 ($10,000 – $10,000)
Net STCG/L = $9,000 gain ($15,000 – $6,000)
Thus, NCG = $0 – $0 = $0.
Net STCG is treated as ordinary income for individuals. Net capital gain rates do not apply to net STCG. The net STCG is $9,000.
Generally, if you own stock in a small corporation that meets the requirements of Sec. 1244 (small business) stock and you sell that stock at a loss, the loss is reported as
A. Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return.
B. Ordinary loss on Form 4797 limited to $25,000 for a single individual and limited to $50,000 for those filing a joint return.
C. Short-term loss on Schedule D limited to $3,000.
D. Long-term loss on Schedule D limited to $3,000.
A. Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return.
Answer (A) is correct.
In the case of a loss on Sec. 1244 stock, the loss shall be treated as an ordinary loss limited to a maximum loss of $50,000 ($100,000 for a husband and wife filing jointly) for any taxable year [Sec. 1244(a-b)]. Any loss from the sale or exchange of Sec. 1244 stock should be reported on Form 4797, Sales of Business Property, up to the maximum limit for ordinary loss. Any gain from Sec. 1244 stock should not be used to offset a loss but should be reported as a capital gain on Schedule D of Form 1040 (Publication 550).
Which of the following items is not a reduction to the basis of an asset?
A. Casualty loss.
B. Rehabilitated building credit.
C. Amount received for granting an easement on property.
D. Personal property tax.
D. Personal property tax.
Answer (D) is correct.
Under Sec. 1016, expenditures, receipts, losses, or other items properly chargeable to capital result in an adjustment in the basis of the property. However, there is no adjustment for deductible taxes. A personal property tax is deductible and does not reduce the basis of the asset.
During 2016, Nicholas made the following dispositions of property:•Sold publicly traded stock, which cost $2,000 and had been held for 2 years, for $3,000
•Sold land, which cost $20,000 and had been held for 9 months, to his brother for $16,000
How should Nicholas report these dispositions on his 2016 return?
A. $1,000 long-term capital gain.
B. $3,000 ordinary loss.
C. $3,000 long-term capital loss.
D. $3,000 short-term capital loss.
A. $1,000 long-term capital gain.
Answer (A) is correct.
A capital gain or loss on the sale of property held more than 1 year is a long-term capital gain or loss. Both stock and land are classified as capital assets. However, under Sec. 267, losses are not allowed on sales or exchanges of property between related parties.
All of the following statements regarding a return of capital distribution based on your stock are true except
A. If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss.
B. When the basis of your stock has been reduced to zero, you should report any additional return of capital as a capital loss.
C. A return of capital reduces the basis of your stock.
D. Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock.
B. When the basis of your stock has been reduced to zero, you should report any additional return of capital as a capital loss.
Answer (B) is correct.
A return of capital is a tax-free distribution that reduces a stock’s basis by the amount of the distribution. If a shareholder’s basis has been reduced to zero because of a tax-free return of capital, any excess amounts received are treated as a capital gain.
What is the individual’s net capital gain based on the following transactions? Total short-term capital losses $ 6,000 Total short-term capital gains 15,000 Total long-term capital losses 10,000 Total long-term capital gains 10,000 A. $22,000 net capital gain. B. $0 net capital gain. C. $9,000 net capital gain. D. $25,000 net capital gain.
B. $0 net capital gain.
Answer (B) is correct.
Short term cap not-net cap gain
For individuals, net capital gain (NCG) is the excess of net LTCG over net STCL. Net STCG is not included in NCG. Under Sec. 1222(11), the term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.
Net LTCG/L = $0 ($10,000 – $10,000)
Net STCG/L = $9,000 gain ($15,000 – $6,000)
Thus, NCG = $0 – $0 = $0.
Net STCG is treated as ordinary income for individuals. Net capital gain rates do not apply to net STCG. The net STCG is $9,000.
