Chapter 12 Questions Flashcards
A gain is recognized when it is taxed.
True. Recognized gains are distinguished from realized gains.
Depreciation taken on business property will reduce its basis.
True. When business property is sold, that depreciation is recaptured as ordinary income.
When selling shares of stock, the specific identification method can result in the lowest recognized gains.
True. This method allows taxpayers the option to select specific shares to sell. At their discretion, they can minimize their recognized gains.
For tax purposes, it is generally recommended to sell highly appreciated assets before they pass on to heirs
False. Inherited assets receive a step-up in basis. Selling a highly appreciate asset before one’s death would result in a large and unnecessary tax hit.
While inherited property receives a new basis upon exchanged, the basis of gifted property carries over.
True. These rules mean, from a tax point of view, it is best to delay the gift of highly appreciate assets until after one’s death.
It is possible for a donee to realize a gain upon the sale of gifted property without needing to recognize that gain for tax purposes.
True. See slide 18 for an illustration of how this can occur for gifts given when their FMV is lower than their basis. And, of course, from a donee’s point of view, any sale of gifted property is a realized gain!
If boot is involved in a 1035 or 1031 exchange, it is much more likely that a party must recognize a gain.
True. In exchanges that do not concern boot, no gain must be recognized.
An exchange of one personal use pickup truck for another may result in a recognized gain.
True. Starting in 2018, such an exchange is no longer considered “like-kind”. Tax-advantaged like-kind exchanges now only concern income-producing property.
The substituted basis rule for 1031 like-kind exchanges require each party to “swap” basis with the other.
True. Said another way, the property keeps its basis as it is exchanged.
A taxpayer must recognize a gain or loss on the exchange of a life insurance policy for an annuity.
False. Such an exchange is a qualified tax-advantaged 1035 exchange.
Once per year, taxpayers may exclude $250,000 or more on the sale of a principle residence.
False. This exclusion is only available once every 2 years.
Wash sales permit taxpayers to recognize losses “for tax purposes” without forfeiting ownership
False. Wash sale rules prohibit taxpayers from recognizing losses without forfeiting ownership.
