Business Property: Gain, Loss, and Other Issues Exam Flashcards
Practice Question Ch 1 - Business Property: Gain, Loss, & Other Issues
Assume Jane owns an office building for which she paid $4,000,000 and an adjusted basis of $3,000,000. Based only on this information, what would Jane’s gain be if she were to sell the building for $5,000,000?
(Search Chapter 1)
a. $1,000,000
b. $5,000,000
c. $2,000,000
d. $12,000,000
Answer: $2,000,000
That’s correct! The gain is equal to the difference between the sales price and the adjusted basis, or $5,000,000 – $3,000,000, which equals $2,000,000.
Practice Question Ch 1 - Business Property: Gain, Loss, & Other Issues
Assume Sanjay owns a parking garage with an adjusted basis of $1,000,000. He exchanges this garage for a strip mall worth $1,200,000. He then sells the strip mall for $1,500,000. What would be his basis in the strip mall?
(Search Chapter 1)
a. $1,500,000
b. $1,000,000
c. $300,000
d. $1,300,000
Answer: $1,000,000
That’s correct! Sanjay’s adjusted basis in his relinquished property is the substituted basis for the replacement property. The $1,000,000 substitutes for whatever basis might otherwise attach to the replacement property.
Practice Question Ch 1 - Business Property: Gain, Loss, & Other Issues
Evelyn sold a machine used in her business for $50,000. She paid a sales commission of $1,000. She purchased the machine for $150,000 and paid installation fees of $2,000. Evelyn deducted depreciation of $25,000 on the machine. What is Evelyn’s realized gain or loss on the sale of the machine?
(Search Chapter 1)
a. loss of $75,000
b. loss of $100,000
c. loss of $103,000
d. loss of $78,000
Answer: loss of $78,000
That’s correct! The amount realized of $49,000 ($50,000 – $1,000) less the adjusted basis of $127,000 ($150,000 + $2,000 – $25,000) results in a loss of $78,000.
Practice Question Ch 1 - Business Property: Gain, Loss, & Other Issues
James had the following §1231 transactions in prior years:
Year 1: ($10,000)
Year 2: ($20,000)
Year 3: $30,000
Year 4: ($5,000)
Year 5: ($2,000)
Year 6: $15,000
What is the character of his year six gains?
(Search Chapter 1)
a. $15,000 ordinary gain
b. $15,000 capital gain
c. $7,000 ordinary gain; $8,000 capital gain
d. $8,000 ordinary gain; $7,000 capital gain
Answer: $7,000 ordinary gain; $8,000 capital gain
That’s correct! The §1231 losses in years 1 and 2 were recaptured in year 3. Therefore, they are no longer nonrecaptured losses. However, years 4 and 5 still have nonrecaptured losses. To the extent of the nonrecaptured losses ($5,000 + $2,000 = $7,000), the gain must be characterized as ordinary. Any remaining gain ($15,000 – $7,000 recaptured) is treated as capital gain.
Practice Question Ch 1 - Business Property: Gain, Loss, & Other Issues
Lightbulb Company sold a machine used in its operations for $55,000. The machine was purchased for $50,000 and $30,000 of depreciation has been deducted. What is the amount and character of the gain or loss from this transaction?
(Search Chapter 1)
a. $25,000 ordinary loss
b. $25,000 capital loss
c. $30,000 ordinary gain; $5,000 §1231 gain
d. $15,000 ordinary gain; $20,000 §1231 gain
Answer: $30,000 ordinary gain; $5,000 §1231 gain
The gain is $35,000 [amount realized of $55,000 less the adjusted basis of $20,000 ($50,000 original basis less $30,000 of depreciation)]. However, only $30,000 must be recaptured as ordinary based on the depreciation deductions. The remaining $5,000 of gain is §1231 gain, which is treated as long-term capital gain.
Exam - Business Property: Gain, Loss, and Other Issues
Tracy purchased land and a building for $200,000. The appraisal valued the land at $180,000 and the building at $45,000. What amounts should Tracy record as the basis for each asset? What would the results be of her purchase price allocation?
(Search Chapter 1)
a. land, $40,000; building, $160,000
b. land, $160,000; building, $40,000
c. land, $180,000; building, $45,000
d. land, $200,000; building, $0
Correct Answer: land, $160,000; building, $40,000
Exam - Business Property: Gain, Loss, and Other Issues
Hyde Park Furniture Corporation sold a building used in its business for $150,000. Hyde Park paid $70,000 for the building several years ago and they have deducted $20,000 of depreciation on the straight-line method. What is the amount and character of any gain or loss on the sale of the building?
(Search Chapter 1)
a. $4,000 ordinary gain; $96,000 §1231 gain
b. $20,000 ordinary gain; $80,000 §1231 gain
c. $100,000 ordinary gain
d. $100,000 §1231 gain
Wrong Answer: $20,000 ordinary gain; $80,000 §1231 gain Wrong
Exam - Business Property: Gain, Loss, and Other Issues
Assume Anderson Vanderbilt owns an artists’ loft. His adjusted basis is $1,000,000. He exchanges this building in a 1031 exchange, and his replacement property costs him $2,400,000. What is Anderson’s substitute basis in the replacement property?
(Search Chapter 1)
a. $1,000,000
b. $2,000,000
c. $3,000,000
d. $4,000,000
Correct Answer: $1,000,000
Exam - Business Property: Gain, Loss, and Other Issues
Mr. Srinivas Thompson intends to complete a 1031 exchange. He sells his property on January 1 of the current year. Which of the following is true with respect to deadlines for next steps?
(Search Chapter 2)
a. He has until February 16 to identify replacement property to a qualified intermediary.
b. He has until February 16 to purchase replacement property.
c. He has until 180 business days from January 1 to identify replacement property.
d. He has 180 calendar days from January 1 to identify replacement property.
Correct Answer: He has until February 16 to identify replacement property to a qualified intermediary.
Exam - Business Property: Gain, Loss, and Other Issues
Alpha Corporation uses a building in Ohio that was purchased five years ago for $100,000. Alpha has deducted $15,000 of depreciation on the building. This year, Alpha exchanged the building for real property in Illinois. The Illinois property had a FMV of $150,000. What amount of gain or loss should Alpha recognize on the exchange?
(Search Chapter 2)
a. $0, as this qualifies as a like-kind exchange Correct Answer
b. $65,000 Wrong
c. $50,000
d. $15,000
Correct Answer: $0, as this qualifies as a like-kind exchange
Exam - Business Property: Gain, Loss, and Other Issues
Kyle sold a machine used in his business for $10,000. Kyle paid $100,000 for the machine plus $2,000 in transfer taxes and $5,000 to deliver the machine. He has deducted $80,000 of depreciation on the machine. What is Kyle’s realized gain or loss on the transaction?
(Search Chapter 2)
a. loss of $10,000 Wrong Answer
b. loss of $15,000
c. loss of $17,000 Correct Answer
d. loss of $97,000
Correct Answer: loss of $17,000
Exam - Business Property: Gain, Loss, and Other Issues
An investor owns a commercial property which was bought for $1,000,000. The investor’s adjusted basis in the property is $900,000. The investor decides to sell, and a buyer pays the investor $1,300,000 for the property. What is the investor’s realized gain?
(Search Chapter 2)
a. $100,000
b. $400,000
c. $1,000,000
d. $1,300,000
Correct Answer: $400,000
Exam - Business Property: Gain, Loss, and Other Issues
Which of the following types of property is not eligible to be exchanged in a tax-deferred manner under Section 1031?
(Search Chapter 2)
a. an apartment complex
b. a strip mall
c. stock in GameStop Corporation
d. a medical equipment storage warehouse
Correct Answer: stock in GameStop Corporation
Exam - Business Property: Gain, Loss, and Other Issues
Three years ago, Ed converted his home to a rental property. At the date of conversion, Ed’s adjusted basis in the home was $200,000, and the FMV was $150,000. After the property was converted to rental use, Ed deducted $21,000 of depreciation on the home. What is the amount of any gain or loss for tax purposes if Ed sells the home for $240,000?
(Search Chapter 2)
a. $240,000 gain
b. $40,000 gain
c. $61,000 gain
d. $111,000 gain Wrong
Wrong Answer: $111,000 gain
Exam - Business Property: Gain, Loss, and Other Issues
Jason sold the building he used in his business for $100,000 cash, a note for $50,000, and the buyer assumed the $75,000 mortgage on the property. What is Jason’s amount realized on the transaction?
(Search Chapter 2)
a. $100,000
b. $150,000
c. $175,000
d. $225,000
Correct Answer: $225,000
Reinie George owns an X-Ray factory. She paid $3,000,000 for it in 2017. In 2021, she decides to sell it for $3,500,000. Her adjusted basis at the time of sale is $2,500,000. Based only on this information, what is Reinie’s gain?
(Search Chapter 1)
a. $1,000,000
b. $2,500,000
c. $3,000,000
d. $0
- Moby Smith owns a covered dog park for which he paid $250,000. He decides he wants to sell the property. Moby’s adjusted basis is $225,000. His buyer, Wallace, pays Moby $350,000. Based only on this information, what is Moby’s gain?
(Search Chapter 1)
a. $100,000
b. $225,000
c. $350,000
d. $125,000
My Answer $125,000
What is realized gain?
(Search Chapter 2)
a. the taxable portion of a gain
b. sales price received less the seller’s adjusted basis
c. perceived gain
d. nine-tenths of the law
My Answer: sales price received less the seller’s adjusted basis - Answer
Farid Zakaria is the exchanger in a 1031 transaction. He is to acquire replacement property with a value of $400,000. His adjusted basis is $350,000. In the exchange, he receives $100,000 in cash and $300,000 in like-kind real property. What amount is boot?
(Search Chapter 2)
a. $400,000
b. $100,000
c. $350,000
d. $250,000
My Answer: $100,000
When two or more taxpayers form a partnership, each partner contributes to some or all aspects of the business, including money, property, labor, or skill. In return for his or her contribution, each partner:
(Search Chapter 1)
a. shares in the profits of the business only
b. is exempt from income tax on the profits of the partnership
c. shares in both the profits and losses of the business
d. is liable only for his or her own actions
c. shares in both the profits and losses of the business
Mitch is a shareholder in a calendar year partnership that made a profit last year. How should Mitch expect to receive official notification of his share of the profits, and when should he expect to receive this notice?
(Search Chapter 2)
a. The details will be on Form W-2, due by January 31.
b. The details will be on Schedule K-1, due by the date Form 1065 is required to be filed, including extensions.
c. The details will be on Form W-2, due by the date Form 1065 is required to be filed, including extensions.
d. The details will be on Schedule K-1, due by January 31.
b. The details will be on Schedule K-1, due by the date Form 1065 is required to be filed, including extensions.
How many partners are required for a partnership to be eligible to elect to be treated as a large partnership?
(Search Chapter 2)
a. at least 5
b. more than 50
c. 100 or more
d. more than 75
c. 100 or more
Smith Enterprises, an eligible entity that has been in operation for several years, made an election by filing Form 8832, Entity Classification Election, on December 15 to be taxed as a partnership effective from January 1 of the next year. Under the general rule that binds business entities for a certain period after their Form 8832 election, how long must Smith Enterprises wait until it can elect to change its classification again by filing another Form 8832?
(Search Chapter 3)
a. 1 year
b. 60 months
c. 2 years
d. It can change its classification immediately if it so desires.
b. 60 months
Herbert Vehicles has three partners who decided to file Form 8832 to change the entity’s status to a C corporation instead of a partnership. When and how can they later make another election to change this classification?
(Search Chapter 3)
a. by filing Form 8832 any time after 60 months from the effective date of the original election
b. by filing Form 2553 at any time
c. They are not permitted to change their classification.
d. by filing Form 8832 at any time
a. by filing Form 8832 any time after 60 months from the effective date of the original election
Acorn Appliances is a C corporation with ten shareholders. The corporation wants to change its classification to become an S corporation. Assuming there are no other time constraints involved, how many shareholders are required to approve the change?
(Search Chapter 4)
a. at least one
b. three or more
c. two or more
d. all ten shareholders
d. all ten shareholders
How are single-member and multiple-member LLCs classified for tax purposes if they have made no election to change their default status?
(Search Chapter 5)
a. as a corporation and a partnership, respectively
b. as a partnership and a corporation, respectively
c. as a disregarded entity and a partnership, respectively
d. both as disregarded entities
Answer: A disregarded entity and a partnership, respectively
What taxes, if any, may a single-member LLC classified as a disregarded entity be responsible for paying on behalf of its owner and employees?
(Search Chapter 5)
a. only Medicare taxes on wages paid to its employees
b. all employment taxes on wages paid to its employees
c. only Social Security taxes on wages paid to its employees
d. none
Got Wrong
Judging by its name, which one of the following organizations would likely not qualify for tax-exempt status under Internal Revenue Code section 501(a)?
(Search Chapter 6)
a. Bob Jones Presidential Campaign
b. Leaco Red Cross Society
c. Veterans of Foreign Wars, Post 8235
d. Woodville South Lions Club
Answer: Bob Jones Presidential Campaign
After an organization has filed an application for tax-exempt status, what may be the response from the IRS if not all of the required information was included with the application?
(Search Chapter 6)
a. The IRS will keep the application on hold until the organization sends the missing information.
b. The IRS will send a letter requesting more information.
c. The IRS will return the incomplete application to the sender.
d. either b or c
Answer: Either b or c
