Chapter 14: Federal and State Income Tax

Question 1

All of the following are considered capital improvements or expenditures when determining adjusted basis, EXCEPT:

Answer 1

Replacing a broken window

A broken window is considered a maintenance item and not a capital improvement

Question 2

If less than 100% of the sales price is received in the year of sale, the tax code considers it to be:

Answer 2

An installment sale

An installment sale under the tax code is any sale in which 100% of the sales price is not received in the year sold

Question 3

The term boot is used as a factor for which one of the following?

Answer 3

Exchanging

Boot is anything of value given during an exchange that is not like property

Question 4

A gain is considered taxable when the property:

Answer 4

Is sold

If a seller realizes a gain on the sale of the property the gain counts as income

Question 5

Which one of the following would not be considered a like-kind property exchange under an IRS 1031 tax-deferred exchange?

Answer 5

An unimproved lot for timber

Real property must be exchange for real property

Question 6

Cost recovery is a term most closely related to:

Answer 6

Depreciation
(The annual expense claim for loss of market value of the improvements due to depreciation is referred to as cost recovery)

Question 7

California state income tax brackets and the standard deduction are adjusted each year based upon the:

Answer 7

California Consumer Price Index
(Income tax brackets and the standard deduction are adjusted periodically for inflation by the California Franchise Tax Board and are based upon the California Consumer Price Index)

Question 8

Under current law, a qualified taxpayer can exclude the entire gain on the sale of his or her principal residence up to __________ if filing a single return

Answer 8

$250,000
(Homeowners are allowed an exemption from federal income taxation on capital gains of personal residential property of a profit up to $250,000 for single taxpayers and $500,000 for couples married at the time of the sale)

Question 9

A method in which an equal portion of a structure’s value is deducted each year is known as:

Answer 9

Straight line depreciation

On a straight line depreciation basis, the same amount is deducted each year

Question 10

A net gain on an asset is the amount:

1. Subject to capital gain taxation.
2. Remaining after capital losses are deducted from capital gains.

Answer 10

Both 1 and 2
(Net gain is what remains after capital losses are deducted from capital gains, and represents the amount subject to capital gain taxation)

Question 11

Which one of the following types of property can be depreciated?

Answer 11

An apartment building
(Land can never be depreciated, nor can a principal residence. Only the apartment building, as an investment property, can be depreciated)

Question 12

Sean O’Brien just sold his personal residence for $185,000. His adjusted basis is $170,000. He will pay 6% of the sales price in brokerage fees and $3,500 in closing costs. For federal income tax purposes, what is the amount of Sean’s capital gain?

Answer 12

$400
(The brokerage commission would be $11,100 ($185,000 x .06) plus closing costs of $3,500 for a total of $14,600 in expenses. Sean grossed $15,000 on the sale ($185,000 - $170,000). The expenses minus the gross gain leaves a net capital gain of $400 ($15,000 - $14,600))

Question 13

To qualify for an exclusion from capital gain on a residential property, the homeowner must:

Answer 13

Have both owned and occupied the property for two of the previous five years.
(The homeowner must have owned and occupied the property for two of the previous five years)