Chapter 6 Flashcards
Determine which of the following items are capital assets.
Group of answer choices
Taxpayer’s home costing $50,000 on which he or she has a $40,000 mortgage
[ Choose ]
Ms. Smith’s personal piano, on which she takes piano lessons
[ Choose ]
Ms. Asbury’s piano, which she uses only for giving piano lessons at $10 a lesson
[ Choose ]
Mr. Furman’s auto that he uses exclusively in his insurance business
[ Choose ]
Bonds bought for investment
[ Choose ]
Tools for sale in Ms. Guilford’s hardware store
[ Choose ]
Mr. Cottey’s boat, which he uses on weekends for recreational fishing
[ Choose ]
Machine used to make keys in Ms. Kenyon’s locksmith shop
[ Choose ]
New refrigerator, which Mr. Elon purchased for use in his home
[ Choose ]
$5,000 diamond ring that Mr. Pembroke gave to his wife on her birthday
[ Choose ]
Land purchased by the Smith’s to build a tennis court for personal use
[ Choose ]
The note receivable held by First National Bank
[ Choose ]
Mr. Donnelly’s personal auto that he uses to drive to and from work
ook at slide 31. There are essentially three types of business/investment assets:
Ordinary income property: inventory and accounts receivable
1231 property: property used in a trade or business and held for more than one year
capital assets: basically everything else
To find out if something is a capital asset, you must simply make sure it’s not (a) ordinary income property or (b) 1231 property.
Is this ordinary income property?
Ordinary income property is inventory and accounts receivable. This is neither. Therefore, it’s not ordinary income property.
Is this 1231 property?
1231 property is property held more than one year and used for business. This is personal use. Therefore, it’s not 1231 property.
Now that we ruled out both other options, the result is that this is a capital asset.
For every asset, your analysis should be:
Is this ordinary income property?
If not ordinary income property, is this 1231 property?
If your answer was no to both questions above, then it’s a capital asset.
Seth gifts to Jordan a Stock in DDD Company. The value of the stock on the date of the gift was $14,000. Seth had acquired the stock 3 years earlier at a price of $9,000. What is the tax consequence to Jordan if Jordan immediately (on the date of the gift) sells the stock for $14,000?
Group of answer choices
No gain or loss.
A short-term capital gain of $5,000.
A long-term capital gain of $5,000.
The annual exclusion would not apply because this is a gift of a future interest.
1
Wanda purchased 100 shares of ABC stock five years ago for $10,000. She recently gifted the stock to her brother, Keith. On the date of the gift, the stock had a fair market value of $7,500. Six months after receiving the stock, Keith decides to sell the stock. Which of the following statements is correct?
Group of answer choices
If Keith sells the stock for $6,750, he will have a short-term capital loss.
If Keith sells the stock for $7,000, he will have a long-term capital loss.
If Keith sells the stock for $8,000, he will have a long-term capital gain.
If Keith sells the stock for $11,000, he will have a short-term capital gain.
1
Robin purchased 10,000 shares of RCM Inc. five years ago for $100,000. She just gave those shares to her son, Seth. The value of the 10,000 shares of stock, as of the date of the gift, was $60,000. Which of the following statements is true?
Group of answer choices
If Seth subsequently sells the shares of RCM Inc. for $105,000, the basis used to calculate his gain or loss will be $60,000.
If Seth subsequently sells the shares of RCM Inc. for $40,000, the basis used to calculate his gain or loss will be $60,000.
If Seth subsequently sells the shares of RCM Inc. for $40,000, the basis used to calculate his gain or loss will be $100,000.
If Seth subsequently sells the shares of RCM Inc. for $105,000, he will not have any gain or loss.
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Trey recently purchased a new machine for his business. The price of the machine was $20,000 but he also paid $100 in sales tax, $300 in freight, and $1,000 for installation. What is Trey’s basis in the new machine?
Group of answer choices
$20,000
$20,400
$21,000
$21,400
1
Sam Stone was the owner of stock that cost him $50,000 when he acquired it in 2014. On January 1, 2015, when the stock was valued at $10,000, he made a bona fide gift of the stock to his niece, Ruth Rock. Ms. Rock held the stock until August 15, 2017, and then sold it for $60,000. What is the amount of the gain or loss that Ms. Rock should include in her adjusted gross income for 2017?
Group of answer choices
$0
$10,000 gain
$30,000 loss
$40,000 loss
1
Monica gifts Hardy a stock in DCC Company. The value of the stock on the date of the gift was $14,000. Monica had acquired the stock for $13,000 five years ago. What is the tax consequence to Hardy if Hardy sells the stock for $15,000 one month after the gift.
Group of answer choices
A short-term capital gain.
A short-term capital loss.
A long-term capital loss.
A long-term capital gain.
1
On July 1, 2017, Jerry gifts to Joanne some shares of stock in BL Company. The value of the stock on the date of the gift was $14,000. Jerry had acquired the stock three years earlier for $6,000. Jerry paid gift tax of $4,800 on the transfer. Assume that the exclusion amount for gifts is not available. Joanne sold the stock for $18,000 on July 1, 2018 (exactly one year from the date of the gift). What is Joanne’s tax consequence?
Group of answer choices
A short-term capital gain of $9,257.
A long-term capital gain of $9,257.
c. A short-term capital gain of $12,000.
A long-term capital gain of $12,000.
A long-term capital gain of $9,257
The basis to Joanne is Jerry’s basis $6,000 plus the pro rata share of gift tax paid.
$4,800 x ($8,000/$14,000) = $2,743 or $8,743.
Sales price $18,000 - $8,743 = $9,257
Basis $6,000
Additional basis from gift tax* $2,743
Total basis $8,743
Sales price $18,000
Basis $8,743
$9,257
*$4,800 x $8,000 / $14,000 = $2,743
The holding period of the donor tacks to the donee making this long term
On March 1, 2015, ABC Company buys a copy machine for use in its business for $20,000. The copy machine is five-year property and is depreciated using the DDB method. The company sells the copy machine for $10,000 on December 31, 2016. Determine the amount of gain/loss the company realizes on the sale.
Group of answer choices
$400 gain
$2,000 loss
$2,800 loss
$1,300 gain
1
Gary dies leaving Sherri stock of CC Company. Gary had acquired the stock in November of this year and died December 10th of this year. The value of the stock on the date of death was $1,000 and Gary’s adjusted basis was $1,200. Presuming that Sherri sells the stock for $1,050 on February 14th of the next year, what is her tax consequence?
Group of answer choices
She has a double basis rule no gain or loss.
She has a short-term capital loss of $150.
She has a long-term capital loss of $150.
She has a long-term capital gain of $50.
1
Stephen purchased a video game console for personal use five years ago for $500. In order to raise money for the “latest and greatest” gaming console, Stephen sold his old console for $100. What is the tax treatment of Stephen’s sale of his old console?
Group of answer choices
Stephen recognizes a $400 loss.
Stephen does not report the sale.
Stephen recognizes a $300 loss.
Stephen recognizes a $100 gain.
Stephen does not report the sale.
Gains and losses on the sale of nonbusiness personal property, such as a video game console, are calculated as the difference between the original cost and the sales price. In general, although gains are taxable, losses are not deductible. Stephen incurred a $400 loss, which is not deductible and, as a result, Stephen will not report the sale.
Uncle Ubb gave his nephew, Leroy Lamprey, a gift of stock worth $10,000. Uncle Ubb’s basis in the stock was $15,000. Leroy sold the stock to an unrelated party for $11,000. What amount of gain or loss should Leroy report as a result of this sale?
Group of answer choices
$0
$4,000 loss
$200 gain
$1,000 gain
$0
When property that has declined in value is received as a gift, the recipient’s basis will depend on whether the property is ultimately sold at a gain or a loss. Since the value of the stock was lower than its basis on the date of the gift, Leroy will use the higher amount, the basis, for computing gains, and the lower amount, the value on the date of gift, for computing losses. If the stock is sold for an amount between the two, neither gain nor loss is recognized, as would be the case if the stock was sold for $11,000.
On June 1, 2016, Gary gave Gertrude a gift of stock worth $10,000, paying no gift tax on the transaction. Gary had purchased the stock for $7,500 in 2012. On October 1, 2016, Gertrude sold the stock to an unrelated party for $11,000. What is the amount and character of Gertrude’s gain upon the sale?
Group of answer choices
$1,000 short-term capital gain
$3,500 long-term capital gain
$1,000 long-term capital gain
$3,500 short-term capital gain
When appreciated property is received as a gift, the donee applies the donor’s basis in the property and the donor’s holding period. Gertrude will recognize a gain for $11,000 - $7,500 or $3,500. The holding period will be from 2012 until the sale on October 1, 2016, making it a long term capital gain
During 2017, an individual taxpayer recognizes a $13,000 short-term capital loss, an $8,000 long-term capital loss and a $9,000 short-term capital gain. What is the amount and nature of the taxpayer’s capital loss carryover to 2018?
Group of answer choices
$4,000 short-term, $8,000 long-term
$4,000 short-term; $5,000 long-term
$1,000 short-term; $5,000 long-term
$1,000 short-term; $8,000 long-term
1
During 2019, an individual recognizes a $11,000 short-term capital loss, an $5,000 long-term capital loss and a $6,000 short-term capital gain. Prior to considering these capital gains and losses, the individual’s adjusted gross income equals $50,000. After taking its capital gains and losses into consideration, the individual’s taxable income equals:
Group of answer choices
$56,000
$50,000
$45,000
$47,000
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