Adjustments to Asset Basis and Capital Gains and Losses Flashcards
To determine net capital gains/losses for the year,
A. Net all gain transactions together and all loss transactions together, then combine.
B. Net short-term gains/losses and long-term gains/losses and report only any net gains.
C. Net all capital gains, both long-term and short-term, together.
D. Net short-term gains/losses and long-term gains/losses separately, then subtract net short-term losses from net long-term gains.
Net short-term gains/losses and long-term gains/losses separately, then subtract net short-term losses from net long-term gains.
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 STCG is treated as ordinary income for individuals.
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 the whole building and 5-year MACRS on the appliances and the remodeling.
B. 27.5-year MACRS on both sides of the duplex, 7-year MACRS on the appliances and remodeling.
C. 27.5-year MACRS on the rental and remodeling, 5-year MACRS on the appliances, and no depreciation on the personal side.
D. 27.5-year MACRS on the rental side, no depreciation on the personal side, and 7-year MACRS on the appliances and remodeling.
27.5-year MACRS on the rental and remodeling, 5-year MACRS on the appliances, and no depreciation on the personal side.
Answer (C) 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.
The holding period for determining short-term and long-term gains and losses includes which of the following?
A. The day you acquired the property.
B. In the case of a bank that repossessed real property, the time between the original sale and the date of repossession.
C. All of the answers are correct.
D. The donor’s holding period in the case of a gift if your basis is the donor’s adjusted basis.
The donor’s holding period in the case of a gift if your basis is the donor’s adjusted basis.
Answer (D) is correct.
In the case of property received as a gift, the basis of the property is generally the same as the donor’s basis. The basis may be increased by a portion or all of the gift tax paid on the transfers. When this occurs, the holding period is carried over from the donor.
Zack had the following capital transactions during Year 2:
2/1/Yr 2 – bought 10 shares of ABC stock at $100 per share
6/1/Yr 2 – sold 100 shares of PDQ stock for $50 per share; was purchased 2/1/Yr 1 at $100 per share
9/9/Yr 2 – sold the 10 shares of ABC stock for $150 per share
How much can Zack deduct as a capital loss on his return for Year 2? (His taxable income is $30,000.)
A. $3,000 net short-term capital loss; $1,500 short-term capital loss carryover to Year 3.
B. $0 net gain or loss; $4,500 long-term capital loss carryover to Year 3.
C. $3,000 net long-term capital loss; $1,500 long-term capital loss carryover to Year 3.
D. $4,500 net long-term capital loss; $0 carryover.
$3,000 net long-term capital loss; $1,500 long-term capital loss carryover to Year 3.
Answer (C) is correct.
Capital losses can be deducted up to $3,000 per year, and the remaining loss can be carried over to the following year. Zack has a $5,000 long-term capital loss on the sale of the PDQ stock and a short-term gain of $500 on the sale of the ABC stock. This results in net long-term capital loss of $4,500. Zack is allowed to deduct $3,000 of the capital loss and carryover the remaining $1,500.
Mark sold a building for $100,000 cash plus property with a fair market value (FMV) of $10,000. He had purchased the building 5 years ago for $85,000. He made $30,000 worth of improvements and deducted $25,000 for depreciation. The buyer assumed Mark’s real estate taxes of $12,000 and mortgage of $20,000 on the building. What is the amount realized on the sale of the building? A. $110,000 B. $130,000 C. $145,500 D. $142,000
$142,000
Answer (D) is correct.
The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mark’s amount realized is $142,000 ($100,000 cash + $10,000 fair market value property + $32,000 liabilities relieved).
Mr. Nehru had the following capital transactions during the current year: Short-term capital gain $1,000 Short-term capital loss 2,700 Long-term capital gain 6,500 Long-term capital loss 1,800 What is the amount of Mr. Nehru’s capital gain net income (or loss) on his current year Schedule D? A. $4,700 B. $7,500 C. $3,000 D. $(3,000)
$3,000
Answer (C) is correct.
Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called “capital gain net income” [Sec. 1222(9)]. This has occurred in the question and is computed below.
Net long-term capital gain ($6,500 – $1,800)
$4,700
Net short-term capital loss ($1,000 – $2,700)
(1,700)
Capital gain net income
$3,000
Webster received 100 shares of Gator Corporation stock as a gift from Aunt Clara on August 1, Year 2, when the fair market value of the stock was $4,000. Clara purchased the stock on June 1, Year 1, for $5,000. On September 15, Year 2, Webster sold the stock for $3,700. Webster’s loss and its character are A. $1,300 short-term capital loss. B. $300 short-term capital loss. C. $1,300 long-term capital loss. D. $300 long-term capital loss.
$300 short-term capital loss.
Answer (B) is correct.
The basis of property acquired by gift (to compute a loss) is the lower of the donor’s basis or the fair market value of the property on the date of the gift (Sec. 1015). The FMV on the date of the gift was lower than Aunt Clara’s basis, so Webster’s basis for purposes of determining loss was $4,000. Webster sold the stock for $3,700 and realized a loss of $300. Since Webster did not receive a carryover basis from Clara, the holding period was not tacked on under Sec. 1223(2). Webster’s holding period ran from the date of the gift, which is less than 1 year (from August 1 to September 15), so the character of the loss is short-term (Sec. 1222).
On July 1 of the current year, Mr. A, a cash-method taxpayer, sold a painting for which he received $50,000 in cash and a note with a face value of $50,000 and a fair market value of $35,000. He paid a commission of $5,000 on the sale. Mr. A had acquired the painting 15 years ago, and his basis was $5,000. What is A’s recognized gain for the current year? A. $90,000 B. $95,000 C. $75,000 D. $50,000
$75,000 Answer (C) is correct. The amount realized under Sec. 1001 includes money received plus the fair market value of other property. Mr. A realized $85,000 ($50,000 cash + $35,000 note). Commissions reduce the amount realized under Reg. 1.263(a)-2. Consequently, Mr. A recognized a gain of $75,000. Amount realized $85,000 Less: Commission (5,000) Net proceeds $80,000 Less: Adjusted basis (5,000) Recognized gain $75,000
Bob and Gloria sold securities during the year. The sales resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. How much can they deduct on their joint return? A. $4,000 B. $3,000 C. $0 D. $7,000
$3,000
Answer (B) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted.
During the current year, Mr. Patel sold a piece of land he had purchased for $40,000. The buyer paid cash of $50,000 and transferred to Mr. Patel a piece of farm equipment having a fair market value of $30,000. The buyer also assumed Mr. Patel’s $10,000 loan on the land. Mr. Patel paid selling expenses of $5,000. What is Mr. Patel’s recognized gain on this sale? A. $45,000 B. $90,000 C. $25,000 D. $50,000
$45,000 Answer (A) is correct. The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mr. Patel realized $90,000 ($50,000 cash + $30,000 fair market value equipment + $10,000 liability relieved). Under Reg. 1.263(a)-2, selling expenses reduce the amount realized. Section 1001(a) provides that the gain from the sale of property is the excess of the amount realized over the adjusted basis. Therefore, Mr. Patel recognized a gain of $45,000. Amount realized $90,000 Less: Selling expenses (5,000) Net proceeds $85,000 Less: Adjusted basis (40,000) Realized and recognized gain $45,000
On March 10 of this year, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers acquired the stock 4 years ago at a cost of $5,000. On April 4 of this year, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18 of this year, when he sold them for $6,000. How should Rogers report the above transactions for the year?
A. A long-term capital gain of $1,600.
B. A long-term capital gain of $1,000.
C. A long-term capital loss of $800 and a short-term capital gain of $2,400.
D. A long-term capital loss of $800.
A long-term capital gain of $1,600.
Answer (A) is correct.
The sale of stock on March 10 was a wash sale under Sec. 1091 because identical stock was repurchased within 30 days (on April 4). No deduction is allowable for any loss that occurs in a wash sale. The $800 realized loss ($4,200 – $5,000) that occurred in March will not be recognized for tax purposes. The disallowed loss is added to the basis of the stock that is subsequently purchased in April. The basis in the stock purchased in April is $4,400 ($3,600 cost + $800 disallowed loss), and a gain of $1,600 is recognized when the stock is sold for $6,000 on July 18. The holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock, so the gain is long-term.
Emma’s brother purchased 100 shares of Clockwork, Inc., stock for $10 per share on December 30, 2017. Emma inherited the shares of Clockwork stock from her brother on September 15, 2018, when it had a fair market value of $15 per share. On December 20, 2019, she sold the stock for $20 per share. What is the amount and character of her gain?
A. The gain of $1,000 is long-term capital gain.
B. The gain of $500 is short-term capital gain.
C. The gain of $500 is long-term capital gain.
D. The gain of $1,000 is short-term capital gain.
The gain of $500 is long-term capital gain.
Answer (C) is correct.
The basis for inherited property is the fair market value (FMV) on the date of the death or at some alternate date (as specified in the tax code). In addition, all inherited property has a long-term holding period. A gain is determined by subtracting the adjusted basis from the amount realized.
Amount realized
$2,000
(100 shares × $20/share)
– Adjusted basis
(1,500)
(100 shares × $15/share)
Gain
$ 500
Thus, Emma has a long-term gain of $500.In December of the current year, Emily sold an antique rug for $4,100. She bought the rug 6 years ago for $1,100. What is her taxable gain, and at what maximum rate will it be taxed?
A. $1,500 long-term capital gain, taxed at 28% rate.
B. $3,000 long-term capital gain, taxed at a regular rate.
C. $1,500 long-term capital gain, taxed at a regular rate.
D. $3,000 long-term capital gain, taxed at 28% rate.
$3,000 long-term capital gain, taxed at 28% rate.
Answer (D) is correct.
The sale of the antique rug qualifies as a sale of a collectible item. For individuals, capital transactions involving long-term holding periods are grouped by tax rates. A 28% rate is applied to gains or losses from the sale of collectible items. The amount of the gain is $3,000 ($4,100 FMV – $1,100 basis).
Mr. Richards made a personal loan of $6,000 to Mr. Henry on January 30, Year 1, so that he could meet personal obligations. The loan was evidenced by a promise to pay and was to bear interest at the prevailing rate. Mr. Henry repaid $1,000 of the loan in Year 2. On June 30, Year 3, Mr. Henry filed for bankruptcy, and settlement was made with his creditors. Under the bankruptcy plan, Mr. Richards received $1,000 in settlement of his claim in Year 3. This is the only gain or loss incurred by Mr. Richards in Year 3. On his Year 3 income tax return, Mr. Richards can deduct A. $4,000 as a short-term capital loss. B. $4,000 as an ordinary loss. C. $3,000 as a short-term capital loss. D. $4,000 as a long-term capital loss.
$3,000 as a short-term capital loss.
Answer (C) is correct.
A taxpayer is entitled to a deduction when a debt becomes worthless during the tax year. The loss by an individual is considered a short-term capital loss if the debt was a nonbusiness debt. A nonbusiness debt is one not created or acquired in connection with the creditor’s trade or business. Assuming Mr. Richards was not in the business of lending money, the debt was a nonbusiness bad debt, and the loss is treated as a short-term capital loss. The amount of the loss equals the $6,000 originally lent less the $2,000 principal collected in Year 2 and Year 3. Of this $4,000 loss, only $3,000 may be deducted in Year 3 (the annual limit).
During Year 1, Mr. F acquired 100 shares of stock in ABC Corporation for $500. During Year 3, he sold the stock for $1,000. His adjusted basis in the stock at the time of sale was $500, and he had no other capital gains or losses during the year. What is the amount and character of income to be reported on F’s income tax return for Year 3? A. $500 short-term capital gain. B. $500 long-term capital gain. C. $500 ordinary income. D. $500 tax-exempt income.
$500 long-term capital gain.
Answer (B) is correct.
F’s gain is the amount realized less the adjusted basis of the stock. The amount realized is the $1,000 selling price. The adjusted basis is the original $500 purchase price. Therefore, his gain is $500 ($1,000 – $500). Stock acquired as an investment or by a trader is a capital asset. The character of the gain is long-term capital gain. Under Sec. 1222(3), long-term capital gain is gain from the sale or exchange of a capital asset held for more than 1 year.
Mark sold a building for $100,000 cash plus property with a fair market value (FMV) of $10,000. He had purchased the building 5 years ago for $85,000. He made $30,000 worth of improvements and deducted $25,000 for depreciation. The buyer assumed Mark’s real estate taxes of $12,000 and mortgage of $20,000 on the building. Mark paid selling expenses of $3,500. What amount of gain should be recognized on the sale of the building? A. $16,500 B. $36,500 C. $48,500 D. $52,000
$48,500 Answer (C) is correct. The amount realized under Sec. 1001 includes money received, fair market value of other property received, and any liabilities of which the seller is relieved. Mark realized $142,000 ($100,000 cash + $10,000 fair market value property + $32,000 liability relieved). Under Reg. 1.263(a)-2, selling expenses reduce the amount realized. Section 1001(a) provides that the gain from the sale of property is the excess of the amount realized over the adjusted basis. His adjusted basis in the building is $90,000 ($85,000 purchase price + $30,000 capital improvements – $25,000 depreciation). Therefore, Mark recognized a gain of $48,500. Amount realized $142,000 Less: Selling expenses (3,500) Net proceeds $138,500 Less: Adjusted basis (90,000) Realized and recognized gain $ 48,500
If 100 shares of stock are purchased on February 14, 2019, what is the earliest date on which the stock can be sold and the gain or loss can qualify for the long-term holding period? A. August 14, 2020. B. February 14, 2020. C. February 15, 2020. D. August 15, 2020.
February 15, 2020.
Answer (C) is correct.
The holding period of an asset for purposes of long-term gain treatment is more than 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition.
Bob sold securities in Year 1. The sales resulted in a capital loss of $7,000. He had no other capital transactions. He and his wife Gloria decide to file separate returns for Year 1. His taxable income was $26,000. What amount of capital loss can he deduct on his Year 1 return, and what amount can he carry over to Year 2?
A. $7,000 in Year 1 and $0 carryover to Year 2.
B. $3,000 in Year 1 and $4,000 carryover to Year 2.
C. $4,000 in Year 1 and $3,000 carryover to Year 2.
D. $1,500 in Year 1 and $5,500 carryover to Year 2.
$1,500 in Year 1 and $5,500 carryover to Year 2.
Answer (D) is correct.
If capital losses exceed capital gains for the tax year, the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return). Thus, Bob will deduct $1,500 in Year 1 and carry over $5,500 to Year 2.
On January 1, Mr. D owned rental property with an adjusted basis to him of $250,000. Mr. D made the following expenditures during the year: Ordinary painting of the building $ 5,000 Repair of one section of the roof (useful life not appreciably extended) 2,500 Legal fees paid to defend title 10,000 Property taxes 6,000 Assessment for local improvement of street that increased the value of the property appreciably 15,000 Not considering depreciation, what is Mr. D’s basis in the property at year end? A. $275,000 B. $240,000 C. $225,000 D. $260,000
$275,000 Answer (A) is correct. Under Reg. 1.162-4, repairs are deductible, while improvements that prolong the life of property or materially increase its value must be capitalized. Therefore, the ordinary painting of a building and repair of a roof, which does not appreciably extend the useful life, are deductible and do not increase basis. Property taxes are also deductible under Sec. 164 and therefore do not increase basis. But assessments for local improvements of the street that increase the value of the property are not deductible and do increase the basis of property [Sec. 164(c)(1)]. Also, expenses paid or incurred in defending or perfecting title of property constitute a part of the cost of property and are not deductible [Reg. 1.212-1(k)]. Therefore, Mr. D’s basis in the property is as follows: Beginning basis $250,000 Fees to defend title 10,000 Assessment for improvements 15,000 Basis at year end $275,000
During 2018, Dana had a capital loss of $5,233 on a sale of investment property. Dana had no other capital transactions. Her 2018 tax return reflected ordinary income of $42,500 and taxable income (before exemptions) of $1,057. What is the amount of the capital loss carryover to 2019? A. $1,176 B. $4,176 C. $0 D. $2,233
$2,233
Answer (D) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. A capital loss carried over to a later tax year retains its long-term or short-term character for the year to which it is carried. A short-term capital loss carryover offsets short-term gain first in the carryover year. If a net short-term capital loss results, this loss offsets long-term capital gain and up to $3,000 of ordinary income on a dollar-for-dollar basis. Therefore, $3,000 of Dana’s capital loss may be deducted against ordinary income in the current year, and $2,233 ($5,233 – $3,000) can be carried over to the following years.
An individual taxpayer has capital gain distributions only and no other capital gains. Which of the following satisfies the reporting requirements?
A. If there are no other capital gains, capital gain distributions must be combined with interest on the Schedule B.
B. Dividends and capital gains distributions are totaled on Schedule B and carried to the front page of Form 1040.
C. No Schedule D is required and the amount is entered directly on Schedule 1, Form 1040.
D. All capital gain distributions must be entered on Schedule B.
No Schedule D is required and the amount is entered directly on Schedule 1, Form 1040.
Answer (C) is correct.
Form 1040, Schedule D is used to compute and summarize total capital gains and/or losses on the sale or disposition of capital assets. In this scenario, the taxpayer only has capital gain distributions and no other types of capital gains. Therefore, Schedule D is not required and the amount is reported directly on Schedule 1, Form 1040.
In January of Year 1, Kirk Kelly bought 100 shares of a listed stock for $8,000. In March of Year 2 when the fair market value was $6,000, Kirk gave this stock to his cousin Clara. No gift tax was paid. Clara sold this stock in June of Year 3 for $7,000. How much is Clara’s reportable gain or loss in Year 3 on the sale of this stock? A. $0 B. $1,000 loss. C. $7,000 gain. D. $1,000 gain.
$0
Answer (A) is correct.
The basis of property received by gift is the donor’s basis (transferred or carryover basis). If the fair market value of the property at the time of the gift is lower, however, the basis for purposes of determining loss is the fair market value (Sec. 1015). Clara’s basis for gain is $8,000, and her basis for loss is $6,000. Therefore, neither gain nor loss is recognized [Reg. 1.1015-1(a)(2)].
Gain Loss Sales price $ 7,000 $ 7,000 Less: Basis (8,000) (6,000) Gain (loss) No gain No loss
Which of the following statements is false?
A. The excess of the amount realized from a sale or exchange of property over the adjusted basis of the property is always recognized gain.
B. The adjusted basis of the property is always the original cost or other original basis adjusted for such items as casualty losses, improvements, and depreciation.
C. A sale is generally a transfer of property for money only or for a promise to pay money.
D. An exchange is a transfer of property in return for other property or services.
The excess of the amount realized from a sale or exchange of property over the adjusted basis of the property is always recognized gain.
Answer (A) is correct.
Several property transactions give rise to a realized gain or loss that is not recognized. Examples include like-kind exchanges, involuntary conversions, and the sale of a principal residence. In most cases, a nontaxable transaction results only in deferral of gain. The basis of the new or acquired property is either the same as the basis in the old property or the cost of the new property less any gain not recognized. With a low basis in the new or acquired property, the deferred gain is generally recognized when the property is again disposed of in a taxable transaction.
Mr. Smith, a single taxpayer, died in 2019. His 2019 taxable income of $40,000 included the following stock transactions:
Adjusted Selling Stock Purchased Sold Basis Price Charlie 03/18/19 5/20/19 $3,000 $4,500 Edward 10/10/16 7/11/19 5,500 1,100 Diane 04/23/19 7/29/19 1,700 1,600 Meg 02/05/17 9/16/19 8,000 6,000 What is the amount of the capital loss deduction for 2019 and the amount of the capital loss carryover to the decedent’s estate?
Capital Loss
Deduction
Carryover
A. $3,000 $0 B. $5,000 $0 C. $5,000 $3,000 D. $3,000 $2,000
$3,000
$0
Answer (A) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. However, there can be no carryover from a decedent to his or her estate. Therefore, $3,000 of Mr. Smith’s capital loss may be deducted, and there is no carryover.
Harold Crowe had the following capital transactions for the year:
$3,000 long-term capital loss
$9,000 long-term capital gain
$2,000 net short-term capital gain
What is the amount of Crowe’s reportable capital gain net income in the Schedule D summary?
A. $4,400
B. $6,000
C. $11,000
D. $8,000
$8,000
Answer (D) is correct.
Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called “capital gain net income” [Sec. 1222(9)]. This has occurred in the question and is computed below.
Net long-term capital gain ($9,000 – $3,000)
$6,000
Net short-term capital gain
2,000
Capital gain net income
$8,000
Do not confuse the term “capital gain net income” with the term “net capital gain.” A “net capital gain” is the excess of net long-term capital gains over net short-term capital losses. It does not include net short-term capital gains. The difference is important because the net capital gain term is used in applying the 0%, 15%, and 20% maximum tax rates on capital gains. The 0%, 15%, and 20% maximum tax rates for individuals do not apply to net short-term capital gains.
Mr. and Mrs. Beet own a house that they rent to non-related parties. They had some major expenses during the year as follows:
$2,000 to replace the cabinets in the kitchen
$500 to replace the stove
$600 to replace the built-in dishwasher
$400 to resurface the tub in the master bathroom
What is the amount and character of their expenses?
A. $2,000 capital improvements and $1,500 repairs expense.
B. $2,600 capital improvements and $900 repairs expense.
C. $3,100 capital improvements and $400 repairs expense.
D. $400 capital improvements and $3,100 repairs expense.
$3,100 capital improvements and $400 repairs expense.
Answer (C) is correct.
Initial basis is adjusted consistent with tax-relevant events. Basis must be increased for expenditures that substantially prolong the life of the property or materially increase its value. Examples include major improvements (e.g., new roof, addition to building) and zoning changes. Maintenance, repair, and operating costs are not capitalized but are expensed in the period in which they are incurred. Thus, $3,100 is the cost to replace the appliances and should be capitalized, and the $400 used to resurface the tub is considered a repair and should be expensed.
A married couple has a $40,000 short-term capital loss, a $20,000 collectible long-term capital gain, and a $25,000 long-term capital gain subject to the 15% rate. What are the amount and the character of their capital gain (loss) after netting the gains and losses?
A. $(20,000) short-term loss and $25,000 long-term gain taxed at 15%.
B. $5,000 long-term gain taxed at 15%.
C. $0
D. $5,000 long-term gain taxed at 28%.
$5,000 long-term gain taxed at 15%.
Answer (B) is correct.
The short-term capital loss is first used to offset the $20,000 collectible long-term capital gain that would be taxed at 28%. The remaining $20,000 of the short-term capital loss is then offset against the $25,000 long-term capital gain taxed at 15%. The $5,000 remaining long-term capital gain taxed at 15% is reported on the return and is subject to tax.
Albina purchased 1,000 shares of Global Tech Growth mutual fund on February 15, 2018, for $15 per share. On January 31, 2019, she sold the 1,000 shares of Global Tech Growth mutual fund for $4.50 per share. Albina had no other capital transactions in 2019. Which of the following is true?
A. Albina has a short-term capital loss of $3,000 on her 2019 tax return and no carryover.
B. Albina has a short-term capital loss of $10,500 in 2019 and can deduct $3,000 on her tax return. She can carry forward a long-term loss of $7,500 to 2020.
C. Albina has a short-term capital loss of $10,500 on her 2019 tax return, and she will be allowed to offset $10,500 of her earnings.
D. Albina has a short-term capital loss of $10,500 in 2019 and can deduct $3,000 on her tax return. She can carry forward a short-term loss of $7,500 to 2020.
Albina has a short-term capital loss of $10,500 in 2019 and can deduct $3,000 on her tax return. She can carry forward a short-term loss of $7,500 to 2020.
Answer (D) is correct.
A short-term capital loss is defined as a loss on a capital asset that has a holding period of less than a year. In addition, the maximum amount of capital loss that can be deducted per year is $3,000. Any additional capital loss may be carried forward to subsequent years. For individuals, if you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less as Albina did, any capital gain or loss is a short-term capital gain or loss. However, in the case of corporations, all losses that are carried forward, whether they are long-term or short-term, become short-term capital losses for the subsequent year.
Albina’s short-term capital loss is
Amount realized
$ 4,500
(1,000 shares × $4.50/share)
\+ Adjusted basis
(15,000)
(1,000 shares × $15/share)
Loss
$(10,500)
She can deduct $3,000 on the 2019 tax return and carry forward $7,500 ($10,500 – $3,000) to 2020.
Sharon sold two collections during 2019. These were her only sales. Determine the amount and character of her gains (losses) on these sales.
Coin collection she began as a child with a basis of $1,000, sold for $5,000
Collection of original short stories she wrote in 2016, sold for $20,000
A. $4,000 long-term capital gain and $20,000 ordinary income.
B. $24,000 long-term capital gain.
C. $20,000 long-term capital gain.
D. $24,000 ordinary income.
$4,000 long-term capital gain and $20,000 ordinary income.
Answer (A) is correct.
A copyright; a literary, musical, or artistic composition; a letter or memorandum; or similar property created by one’s personal efforts is an ordinary income asset. Coin collections are listed as capital assets. Thus, it must be recognized as a capital gain or loss at its sale.
Sue’s father purchased 1,000 shares of ABC stock for $10 per share on December 30, Year 1. Sue inherited the 1,000 shares of ABC stock from her father on September 15, Year 2. The FMV at the time of the inheritance was $20 per share. On December 20, Year 2, she sold the stock for $25 per share. What is the amount and character of the gain on the sale of the stock? A. $15,000 short-term capital gain. B. $15,000 long-term capital gain. C. $5,000 long-term capital gain. D. $5,000 short-term capital gain.
$5,000 long-term capital gain.
Answer (C) is correct.
Publication 551 states that the taxpayer’s basis in property inherited from a decedent is generally the FMV of the property at the date of the individual’s death. The holding period for inherited property is automatically long-term. Therefore, the gain is a $5,000 [1,000 × ($25 – $20)] long-term capital gain.
Mr. J bought an asset on June 19, Year 1. What is the earliest date on which Mr. J could have sold that asset and qualified for long-term capital gain or loss treatment? A. December 19, Year 1. B. June 20, Year 2. C. June 19, Year 2. D. December 20, Year 1.
June 20, Year 2.
Answer (B) is correct.
For assets acquired after 1987, long-term capital gain or loss treatment is provided if the asset is held for more than 1 year. The general rule is that the date the property is acquired is excluded and the date that the property is disposed of is included in this computation of the holding period. Since Mr. J bought the asset on June 19, Year 1, his holding period is treated as beginning June 20, Year 1. Exactly 1 year is considered to have expired on June 19, Year 2. Therefore, on June 20, Year 2, more than 1 year has passed, which would satisfy the long-term holding period requirement.
Feld, the sole stockholder of Maki Corp., paid $50,000 for Maki’s stock in Year 1. In Year 2, Feld contributed a parcel of land to Maki but was not given any additional stock for this contribution. Feld’s basis for the land was $10,000, and its fair market value was $18,000 on the date of the transfer of title. What is Feld’s adjusted basis for the Maki stock? A. $52,000 B. $68,000 C. $50,000 D. $60,000
$60,000 Answer (D) is correct. A shareholder recognizes no gain on the voluntary contribution of capital to a corporation. The contribution of capital merely increases the shareholder’s basis in the corporation (Reg. 1.118-1). The shareholder’s basis is increased by the basis in the property contributed, not by the fair market value. Feld will recognize no gain on the contribution and his basis for the Maki stock is Cost of stock $50,000 Contribution of property (basis) 10,000 Adjusted basis in stock $60,000
James and Annie Bourke sold stock in the current year. The sale resulted in a short-term capital loss of $4,000. The Bourkes had no other capital transactions during the year. Their taxable income was $10,000. How much of the capital loss is deductible on their joint return, and how much must be carried over to the next year? A. $0 loss; $4,000 carryover. B. $3,000 loss; $1,000 carryover. C. $4,000 loss; $0 carryover. D. $3,000 loss; $0 carryover.
$3,000 loss; $1,000 carryover.
Answer (B) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. Therefore, $3,000 of James and Annie’s capital loss may be deducted, and $1,000 may be carried over.
In January of the current year, Mrs. Black purchased an office building and used office furnishings. The used office furnishings consisted of chairs, desks, and file cabinets. Of the purchase price, $900,000 was allocated to the office building and $50,000 was allocated to the used office furnishings. According to the General Depreciation System (GDS) under MACRS for depreciation, what recovery period must she use for the purchased items?
A. 27 1/2 years for the entire asset, building and furnishings.
B. 39 years for the building and 5 years for the used office furnishings.
C. 39 years for the building and 7 years for the used office furnishings.
D. 27 1/2 years for the building and 7 years for the used office furnishings.
39 years for the building and 7 years for the used office furnishings.
Answer (C) is correct.
Depreciation may be taken on property that is depreciable under MACRS. Such property must be appropriately classified and depreciation taken over the recovery period prescribed by the IRC. Nonresidential real property is Sec. 1250 property. It includes office buildings, stores, or warehouses that are not classified as residential real property and are not otherwise specified to have a life less than 27 1/2 years. The recovery period of this property is 39 years. Seven-year property includes office furniture and fixtures (such as desks, files, and safes), agricultural machinery and equipment, and any property that does not have a class life and has not been designated by law as being in any other class. Thus, the building will have a recovery life of 39 years and the office furniture a recovery life of 7 years.
All of the following statements regarding a return of capital distribution based on your stock are true EXCEPT
A. When the basis of your stock has been reduced to zero, you should report any additional return of capital as a capital loss.
B. Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock.
C. If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss.
D. A return of capital reduces the basis of your stock.
When the basis of your stock has been reduced to zero, you should report any additional return of capital as a capital loss.
Answer (A) 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.
During Year 1, Mr. Brown had a capital loss of $10,000 on a sale of property he owned. Mr. Brown had no other capital transactions. His Year 1 tax return reflected ordinary income of $37,412 and taxable income of $2,000. What is the amount of the capital loss carryover to Year 2? A. $7,000 B. $8,000 C. $3,000 D. $0
$7,000
Answer (A) is correct.
Individuals and other noncorporate taxpayers may deduct up to $3,000 of a capital loss against ordinary income. Any excess capital loss may be carried over for an unlimited time period until the loss is exhausted. A capital loss carried over to a later tax year retains its long-term or short-term character for the year to which it is carried. A short-term capital loss carryover offsets short-term gain first in the carryover year. If a net short-term capital loss results, this loss offsets long-term capital gain and up to $3,000 of ordinary income on a dollar-for-dollar basis. Therefore, $3,000 of Mr. Brown’s capital loss may be deducted against ordinary income in the current year, and $7,000 ($10,000 – $3,000) can be carried over.
In the current year, Robert sold a building used in his business. His records reflect the following information: Original cost of building $150,000 Improvements made to building 50,000 Broker’s commissions paid on sale 10,000 Cash received on sale 100,000 Total property taxes for the year paid by Robert 3,000 Portion of property taxes imposed on purchaser and reimbursed in a separate payment to Robert by purchaser under IRC 164(d) 1,000 Mortgage assumed by buyer 80,000 Accumulated depreciation 70,000 Fair market value of other property received 20,000 What is the amount of gain Robert must recognize from the sale of the property? A. $60,000 B. $71,000 C. $61,000 D. $70,000
$60,000 Answer (A) is correct. Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage. When calculating the amount realized, the seller does not include the reimbursement for real property taxes treated under Sec. 164(d) as imposed on the purchaser. The property taxes paid by Robert are not included in either the amount realized or the adjusted basis because they are deductible expenses. The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. Cash received $100,000 FMV of other property 20,000 Mortgage assumed 80,000 Amount realized $200,000 Less: Adjusted basis (130,000) Commissions (10,000)
$ 60,000
On June 15, Year 2, Tim sold 100 shares of Y Corporation stock for $20 per share. Tim’s records relating to the sale reflect the following information:
Number
Date Purchased
of Shares
Adjusted Basis
June 1, Year 1
40
$25
January 2, Year 2
60
$10
What is the character and amount of Tim’s gain or loss?
A. $600 long-term capital gain and $200 long-term capital loss.
B. $600 long-term capital gain and $200 short-term capital loss.
C. $600 short-term capital gain and $200 long-term capital loss.
D. $600 short-term capital gain and $200 short-term capital loss.
$600 short-term capital gain and $200 long-term capital loss.
Answer (C) is correct.
Under Reg. 1.1012-1(c), the basis and holding period of stock that was acquired in several different transactions is determined by specific identification of the stock sold. If the stock sold cannot be identified to any purchase or lot, it is assumed to be the first stock purchased or acquired; i.e., the FIFO (first-in, first-out) rule is applied. In this transaction, the number of shares sold equals the number purchased. So, the issue is determining the amount and character of gain. The first 40 shares were purchased on June 1, Year 1, for $25 per share. The sale produces a long-term capital loss of $200 ($800 – $1,000). The remaining 60 shares were purchased on January 2, Year 2, for $10 per share. Their sale results in a short-term capital gain of $600 ($1,200 – $600).
For Year 1, Jonnie’s books and records reflected the following: Taxable income $35,000 Short-term gain 500 Short-term loss (4,800) Long-term gain 1,500 Long-term loss (2,600) What is the amount and character of his capital loss carryover to Year 2? A. $2,400 short-term; $0 long-term. B. $4,300 short-term; $1,100 long-term. C. $1,300 short-term; $1,100 long-term. D. $1,900 short-term; $3,500 long-term.
$1,300 short-term; $1,100 long-term.
Answer (C) is correct.
The deduction for any capital loss is the excess of capital losses over capital gains (Sec. 1211). The capital loss deduction, however, is limited to $3,000 in any year. Unused capital losses may be carried forward indefinitely. Short-term capital losses are considered first to determine the character of the carryover. Therefore, Jonnie will deduct $3,000 of his short-term capital loss and carry over the remaining $1,300 as short-term loss and $1,100 as long-term loss.
Milton spent $70,000 for a building that he used in his business. He made improvements at a cost of $20,000 and deducted a depreciation of $10,000. He sold the building for $100,000 cash and received property having a fair market value of $20,000. The buyer assumed Milton’s real estate taxes of $3,000 and a mortgage of $17,000 on the building. Selling expenses were $4,000. The gain on the sale is A. $10,000 B. $52,000 C. $56,000 D. $40,000
$56,000 Answer (C) is correct. Publication 544 calculates the gain on sale as follows: Amount realized: Cash $100,000 FMV of property received 20,000 Real estate taxes assumed by buyer 3,000 Mortgage assumed by buyer 17,000 Minus: Selling expenses (4,000) $136,000 Adjusted basis: Cost of building $ 70,000 Improvements 20,000 Total $ 90,000 Minus: Depreciation (10,000) Adjusted basis $ 80,000 Gain on sale $ 56,000
On September 30, Year 1, Mr. O’Donnell purchased investment land. On April 15, Year 2, Mr. O’Donnell traded his land for some other investment land in a nontaxable exchange. On October 5, Year 2, Mr. O’Donnell sold the land received in the exchange for a gain. His gain will be treated as
A. A short-term capital gain.
B. Ordinary income.
C. Part short-term capital gain, part long-term capital gain.
D. A long-term capital gain.
A long-term capital gain.
Answer (D) is correct.
If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held [Sec. 1223(1)]. Thus, when the property is sold, the holding period includes the holding period of the property exchanged. And, under Sec. 1222, capital assets held more than 1 year are treated as long-term.
Mr. Wolf purchased a building 20 years ago to use in his business. The purchase price was $400,000. He paid $100,000 cash and took out a mortgage of $300,000. Ten years later, he made certain permanent improvements to the building at a cost of $80,000. In the current year, Mr. Wolf sold the building for $600,000 in cash and relief from the remaining mortgage balance of $100,000. By the time of sale, Mr. Wolf had repaid a total of $200,000 principal on the original $300,000 mortgage and had deducted $180,000 total depreciation on the original cost and improvements. What is Mr. Wolf’s realized gain on the sale? A. $400,000 B. $700,000 C. $480,000 D. $200,000
$400,000
Answer (A) is correct.
The amount of the realized gain is the amount realized less the adjusted basis. Mr. Wolf realized $700,000 ($600,000 cash + $100,000 debt relief) from the sale of the building. His basis in the building was $300,000 ($400,000 purchase price + $80,000 capital improvements – $180,000 depreciation). His realized gain is therefore $400,000 ($700,000 amount realized – $300,000 adjusted basis).
Mrs. Yee purchased stock in Jones Corporation in 2014 for $500. In 2017, she received a distribution of $800 when Jones had no current or accumulated earnings and profits. In 2019, Mrs. Yee received a $200 dividend when Jones had earnings and profits in excess of its dividend distribution. There has been no other activity on this stock. What is Mrs. Yee’s basis in her Jones Corporation stock as of December 31, 2019? A. $(300) B. $500 C. $(500) D. $0
$0
Answer (D) is correct.
Section 316 provides specific rules to determine whether a distribution is taxable as a dividend or is a tax-free return of capital. If a corporation has a distribution that is deemed to be made out of earnings and profits, then the distribution would be taxable as a dividend. If a corporation has no earnings and profits, the distribution is deemed a return of capital and is tax-free until basis is reduced to zero. A return of capital reduces the stock basis while distributions in excess of basis are treated as capital gains and do not reduce basis. Likewise, a taxable dividend has no effect on basis.
On July 1, Year 1, Lila Perl paid $90,000 for 450 shares of Janis Corporation common stock. Lila received a nontaxable stock dividend of 50 new common shares in November of Year 5. On December 20, Year 5, Lila sold the 50 new shares for $11,000. How much should Lila report in her Year 5 return as long-term capital gain? A. $2,000 B. $11,000 C. $1,000 D. $0
$2,000 Answer (A) is correct. When a shareholder receives a nontaxable stock dividend, the basis of the new stock must be determined by allocating to it part of the adjusted basis of the old stock (Sec. 307). The new shares (50) represented 10% of the total shares owned (500) after the stock dividend. Therefore, the basis of the new shares is $9,000 ($90,000 × 10%). The holding period of the new shares includes the holding period of the old shares, i.e., from July 1, Year 1 [Sec. 1223(5)]. This results in a $2,000 long-term capital gain as computed below. Sale proceeds $11,000 Less: Allocated basis (9,000) Realized and recognized gain $ 2,000
On June 1, 2017, Mr. Smart purchased investment land. On January 31, 2018, Mr. Smart traded the land plus cash for some other investment land in a nontaxable exchange. On August 15, 2019, he sold the land received in the nontaxable exchange for a gain. What is the character of Mr. Smart’s gain for 2019?
A. Short-term capital gain.
B. Long-term capital gain.
C. Part short-term capital gain and part long-term capital gain.
D. Ordinary income.
Long-term capital gain.
Answer (B) is correct.
If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held [Sec. 1223(1)]. Thus, when the property is sold, the holding period includes the holding period of the property exchanged. And, under Sec. 1222, capital assets held more than 1 year are treated as long-term.
Pandora invested in the Box Mutual Fund by purchasing 1,000 shares on November 9, Year 1. On the first day of every month, the Box Fund pays a dividend that Pandora elects to have reinvested into the Box Fund. On average, Pandora received five additional shares per month. On December 15, Year 2, Pandora sold off her entire interest in the Box Fund (1,065 total shares). How many of the Box Fund shares sold by Pandora will qualify for the long-term holding period? A. 1,065 B. 1,005 C. 1,000 D. 0
1,005
Answer (B) is correct.
The holding period of an asset for purposes of long-term gain treatment is 1 year from the date of acquisition, not including the day of acquisition but including the day of disposition. In this case, the only dividend reinvestment received 1 year away from the date of sale was the one received 12/1/Year 1. The other shares were received less than 1 year from the date of sale.
Stanley Garret purchased 1,000 shares of Pat Corporation common stock at $5 per share in Year 1. On September 19, Year 3, he received 1,000 stock rights entitling him to buy 250 additional shares of Pat Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value of the stock was $12 per share ex-rights and that of the rights was $1 each. Garret did not exercise the rights; he let them expire on November 28, Year 3. What should be the loss that Garret can report for Year 3? A. A long-term capital loss of $385. B. A short-term capital loss of $250. C. A short-term capital loss of $1,000. D. No gain or loss.
No gain or loss.
Answer (D) is correct.
When a taxpayer receives nontaxable stock rights, the cost basis of the rights under Sec. 307 is determined by allocating part of the basis of the stock on which the distribution was made. If the fair market value of the rights at the time of the distribution is less than 15% of the fair market value of the stock held at that time, the allocation is elective, but no allocation is made unless the stock rights are sold or exercised. If stock rights are allowed to expire, no allocation is made and no loss is recognized [Reg. 1.307-1(a)].
On August 20, 2019, Martine sold all the stock she owned. Her books and records for 2019 indicate the following:
Adjusted
Selling
Stock
Purchased
Basis
Price
ABX, Inc.
06/12/19
$2,000
$2,300
CCC, Inc.
12/22/18
800
1,000
JMC, Inc.
08/10/18
4,500
4,900
JP, Inc.
02/13/17
3,000
5,800
What is the amount of short-term gain (loss) and long-term gain (loss) that Martine would include on her return for 2019?
A. $500 short-term; $3,200 long-term.
B. $300 short-term; $3,400 long-term.
C. $900 short-term; $2,800 long-term.
D. $300 short-term; $3,000 long-term.
$500 short-term; $3,200 long-term.
Answer (A) is correct.
For property acquired after 1987, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year (Sec. 1222). If the capital gain or loss is not long-term, it is short-term. A net long-term capital gain is the excess of long-term capital gains over long-term capital losses. The two long-term transactions (the JMC and JP stock) resulted in a net long-term capital gain of $3,200. A net short-term capital gain is the excess of short-term capital gains over short-term capital losses. There were two short-term transactions: the ABX and CCC stock, resulting in a net short-term capital gain of $500.
Which of the following statements concerning the holding period of assets is false?
A. In the case of inherited property, if the property is sold within 12 months of the decedent’s death, the holding period will be long-term regardless of the actual holding period.
B. In the case of an involuntary conversion, the holding period includes that of the converted asset.
C. In the case of nontaxable exchanges, the holding period of property received generally includes the holding period of the property given up/exchanged.
D. In the case of a gift with FMV greater than AB, the holding period begins on the day after you receive the gift.
In the case of a gift with FMV greater than AB, the holding period begins on the day after you receive the gift.
Answer (D) is correct.
Under Sec. 1015, the basis of property acquired by gift is generally (i.e., for a gain) the same as the basis in the hands of the donor. Under Sec. 1223(2), the holding period of property that has a carryover basis (the same basis as the prior holder’s) includes the holding period of the prior owner.
All of the following statements are false EXCEPT
A. The yearly limit on the amount of the capital loss you can deduct is 20% of AGI (10% if you are married filing separately).
B. The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.
C. When you carry over any capital loss, its character will be long-term.
D. If the total of your capital gains is more than the total of your capital losses, the excess is nontaxable.
The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.
Answer (B) is correct.
Capital transactions are separated into long-term and short-term gains and losses and are netted separately before being combined and reported on Schedule D.
