Chapter 11 Flashcards
Leesburg sold a machine for $2,200 on November 10th10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg’s gain or loss realized on the machine?
$800 gain
The gain realized is the $2,200 amount realized less the $1,400 ($2,600 − $1,200) adjusted basis.
The sale for more than the original cost basis (before depreciation) of machinery used in a trade or business and held for more than one year results in which of the following types of gain or loss?
a) capital or ordinary
b) ordinary only
c) capital and §1231
d) §1245 and §1231
e) none of these choices are correct
d) §1245 and §1231
Because the sales price exceeds the original basis, §1245 depreciation recapture and §1231 gain will be recognized.
Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte’s gain or loss?
$7,500, ordinary gain
§1245 recaptures the lesser of depreciation taken ($12,500) or gain ($7,500) as ordinary income. Any remaining gain would be §1231 gain.
Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman’s gain or loss?
$20,000 ordinary gain, and $5,000 §1231 gain
§1245 recaptures the lesser of depreciation taken ($20,000) or gain ($25,000) as ordinary income. The remaining $5,000 gain would be §1231 gain.
Sumner sold equipment that it uses in its business for $30,000. Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming that this is Sumner’s only disposition during the year, what is the amount and character of Sumner’s gain or loss?
$10,000, §1231 loss
There is no depreciation recapture when a §1231 asset is sold at a loss.
Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad’s gain or loss assuming this is Brad’s only asset sale of the year?
$25,000 §1231 gain and $50,000 unrecaptured §1250 gain
Unrecaptured §1250 recaptures the lesser of depreciation taken ($50,000) or gain ($75,000). This amount is then taxed at no more than 25 percent. The remaining $25,000 gain would be §1231 gain.
When do unrecaptured §1250 gains apply?
It applies only when noncorporate taxpayers sell depreciable real property at a gain
Alpha sold machinery that it used in its business to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the machinery 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?
$20,000 ordinary income under §1239
§1239 recharacterizes the entire gain as ordinary income when depreciable property is sold to a related person.
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:
Asset Original Cost Accumulated Depreciation Gain or Loss
Machinery $ 30,000 $ 7,000 $ 10,000
Computers 10,000 6,000 (2,000)
Building 90,000 20,000 (2,000)
Assuming Brandon’s marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon’s tax liability?
$6,000 ordinary income and $1,920 tax liability
The depreciation recapture of $7,000 is characterized as ordinary income under §1245. The remaining $3,000 gain on the machinery is §1231 gain. The $4,000 §1231 loss on the computers and building offsets the $3,000 §1231 gain on the machinery. The $1,000 net §1231 loss becomes ordinary and offsets the $7,000 ordinary gain. The remaining ordinary gain of $6,000 is taxed at 32 percent, which results in $1,920 of tax.
Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last five years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets:
Asset Original Cost Accumulated Depreciation Gain or Loss
Machinery $ 30,000 $ 7,000 $ 10,000
Land 40,000 0 20,000
Building 90,000 20,000 (5,000)
Assuming Brandon’s marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon’s tax liability?
Use dividends and capital gains tax rates for reference.
$13,000 §1231 gain, $12,000 ordinary income, and $5,790 tax liability
Depreciation recapture of $7,000 becomes ordinary income. In addition, Brandon has a $23,000 §1231 gain (consisting of the remaining $3,000 gain from the machinery and the $20,000 gain from the land) and $5,000 §1231 loss (from the building), which nets to an $18,000 net §1231 gain. The §1231 look-back rule recharacterizes $5,000 of the §1231 gain to ordinary income. Thus, $12,000 (32 percent) of ordinary income and $13,000 (15 percent) of §1231 gain. The calculations result in $5,790 of tax.
Ashburn reported a $105,000 net §1231 gain in Year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses during Years 1 to 5, what amount of Ashburn’s net §1231 gain for Year 6, if any, is treated as ordinary income?
$60,000
The §1231 look-back rule recharacterizes $60,000 of the §1231 gain to ordinary income, the amount of the prior five years’ losses that received ordinary loss treatment.
Koch traded Machine 1 for Machine 2 when the fair market value of both machines was $50,000. 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?
$50,000
The exchange does not qualify as a like-kind exchange because the property exchanged is not real property used in a trade or business or held for investment. Koch’s basis in the new machine is the fair market value of $50,000.
Which one of the following is not considered boot in a like-kind exchange?
a) cash
b) other property
c) mortgage given
d) mortgage received
e) all of the choices can be considered as boot
Mortgage received
Mortgage received is treated as transferring cash to the other party, and thus it is not boot to the recipient.
Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $28,000. The new land had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington’s recognized gain or loss on the exchange?
$2,000
The recognized gain is the lesser of the fair market value of the boot ($2,000 of office equipment) or realized gain of $9,000 ($35,000 fair market value plus $2,000 boot less $28,000 adjusted basis).
Sadie sold 10 shares of stock to her brother, George, for $500 16 months ago. Sadie had purchased the stock for $600 two years earlier. If George sells the stock for $700, what are the amount and character of his recognized gain or loss in the current year?
$100 long-term capital gain
Sadie’s loss of $100 is deferred and her brother receives a dual basis in the stock. If he sells the stock at a gain, he receives a $600 carryover basis from Sadie. If he sells the stock at a loss, he receives a $500 cost basis in the stock. George’s holding period begins when he buys the stock, so he receives a $100 ($700 proceeds less $600 basis) long-term gain on the sale.
