E.41 Tax consequences of property transactions

Question 1

Which of the following is NOT a type of property transaction that can have tax consequences?

A. Sale of a principal residence
B. Exchange of like-kind property
C. Transfer of a gift
D. Renting out a vacation home

Answer 1

D. Renting out a vacation home

E.41 Tax consequences of property transactions

Question 2

What is the tax treatment of a gain on the sale of a principal residence?

A. Fully taxable
B. Partially taxable
C. Non-taxable
D. Taxable at the capital gains rate

Answer 2

C. Non-taxable

E.41 Tax consequences of property transactions

Question 3

Which of the following property transactions is NOT eligible for tax-deferred treatment under Section 1031 of the Internal Revenue Code?

A. Exchange of real estate for like-kind real estate
B. Exchange of a business vehicle for another business vehicle
C. Exchange of artwork for other artwork
D. Exchange of rental property for other rental property

Answer 3

C. Exchange of artwork for other artwork

E.41 Tax consequences of property transactions

Question 4

Question: What happens to the donor’s basis when appreciated property is gifted to a donee?
A. The donor must pay income tax on the appreciation
B. The donee receives a step-up in basis
C. The donee assumes the donor’s basis in the property
D. The donee must pay gift tax on the appreciated value

Answer 4

C. The donee assumes the donor’s basis in the property

When appreciated property is gifted, the donee takes on the donor’s cost basis, which is the original purchase price of the property, according to IRC Section 1015(a). There is no step-up in basis for gifts, and neither party pays income tax on the gift.

E.41 Tax consequences of property transactions

Question 5

Under what circumstances can a taxpayer deduct losses from a rental property?

A. When the taxpayer actively participates in managing the rental property
B. When the rental property is used as a vacation home for part of the year
C. When the rental property is held for investment purposes only
D. When the rental property generates a profit in at least three out of five consecutive years

Answer 5

A. When the taxpayer actively participates in managing the rental property

E.41 Tax consequences of property transactions

Question 6

What is the tax treatment of a loss on the sale of a principal residence?

A. Fully deductible
B. Partially deductible
C. Non-deductible
D. Deductible at the capital loss rate

Answer 6

C. Non-deductible

E.41 Tax consequences of property transactions

Question 7

Which of the following is NOT a requirement for a property exchange to qualify for tax-deferred treatment under Section 1031 of the Internal Revenue Code?

A. The exchanged properties must be like-kind
B. The taxpayer must hold the exchanged properties for at least one year
C. The exchange must be completed within a certain time period
D. The exchange must be conducted through a qualified intermediary

Answer 7

B. The taxpayer must hold the exchanged properties for at least one year

E.41 Tax consequences of property transactions

Question 8

Which of the following is a tax consequence of selling rental property?

A. The taxpayer may be subject to recapture of depreciation
B. The taxpayer may be subject to gift tax
C. The taxpayer may be subject to estate tax
D. The taxpayer may be subject to capital gains tax

Answer 8

D. The taxpayer may be subject to capital gains tax

E.41 Tax consequences of property transactions

Question 9

Which of the following is NOT a factor that can affect a taxpayer’s basis in a property?

A. The original purchase price of the property
B. The cost of any improvements made to the property
C. The fair market value of the property at the time of inheritance
D. The amount of mortgage interest paid on the property

Answer 9

D. The amount of mortgage interest paid on the property

E.41 Tax consequences of property transactions

Question 10

What is the tax treatment of a gain on the sale of a vacation home?

A. Fully taxable
B. Partially taxable
C. Non-taxable
D. Taxable at the capital gains rate

Answer 10

B. Partially taxable.

E.41 Tax consequences of property transactions

Question 11

John owns a rental property that he has been renting out for several years. This year, he sold the property for $200,000, realizing a gain of $50,000. What is the tax consequence of this sale?

A. John is not subject to any tax on the sale
B. John must pay capital gains tax on the full amount of the gain
C. John must pay recapture tax on the full amount of the gain
D. John must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion

Answer 11

D. John must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion.

E.41 Tax consequences of property transactions

Question 12

Sarah inherited a vacation home from her grandmother, who passed away last year. The home was worth $300,000 at the time of her grandmother’s death, and Sarah recently sold it for $350,000. What is the tax consequence of this sale?

A. Sarah is not subject to any tax on the sale
B. Sarah must pay capital gains tax on the full amount of the gain
C. Sarah must pay estate tax on the full amount of the gain
D. Sarah must pay capital gains tax on a portion of the gain

Answer 12

D. Sarah must pay capital gains tax on a portion of the gain

E.41 Tax consequences of property transactions

Question 13

Mary recently exchanged her rental property for another property of equal value, as part of a Section 1031 exchange. What is the tax consequence of this exchange?

A. Mary is not subject to any tax on the exchange
B. Mary must pay capital gains tax on the full amount of the gain
C. Mary must pay recapture tax on the full amount of the gain
D. Mary must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion

Answer 13

A. Mary is not subject to any tax on the exchange

E.41 Tax consequences of property transactions

Question 14

Kelly owns a rental property that has a basis of $150,000. She sells the property for $200,000, but she carries back a $50,000 note secured by the property. What is the tax consequence of this transaction?

A. Kelly must pay capital gains tax on the full amount of the gain
B. Kelly must pay recapture tax on the full amount of the gain
C. Kelly must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D. Kelly is not subject to any tax on the transaction

Answer 14

A. Kelly must pay capital gains tax on the full amount of the gain

E.41 Tax consequences of property transactions

Question 15

Mark owns a rental property that he has been depreciating for several years. He recently sold the property for $300,000, and he had a basis in the property of $200,000. What is the tax consequence of this sale?

A. Mark must pay capital gains tax on the full amount of the gain
B. Mark must pay recapture tax on the full amount of the gain
C. Mark must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D. Mark is not subject to any tax on the transaction

Answer 15

B. Mark must pay recapture tax on the full amount of the gain

E.41 Tax consequences of property transactions

Question 16

Alice sells a rental property for $300,000 that she purchased for $200,000 ten years ago. She has claimed a total of $40,000 in depreciation expenses over the ownership period. What is the total amount of capital gain that Alice must report?

A. $100,000
B. $140,000
C. $120,000
D. $60,000

Answer 16

B. $140,000

The capital gain on the property is calculated by taking the selling price minus the adjusted basis. The adjusted basis is the original cost minus any depreciation. Here, it’s $200,000 - $40,000 = $160,000. The gain is therefore $300,000 - $160,000 = $140,000. This includes $40,000 of depreciation recapture.

E.41 Tax consequences of property transactions

Question 17

Bob, who is in the 22% tax bracket, sells an investment asset that he has held for 18 months. The sale results in a capital gain of $50,000. How will this gain be taxed?

A. As a long-term capital gain at 0%
B. As a long-term capital gain at 15%
C. As a short-term capital gain at his ordinary income tax rate
D. As a short-term capital gain at 15%

Answer 17

C. As a short-term capital gain at his ordinary income tax rate

Since the asset was held for less than 24 months, it qualifies as a short-term capital gain. Short-term gains are taxed at the seller’s ordinary income tax rates, which for Bob is 22%.

E.41 Tax consequences of property transactions

Question 18

Christine inherits a stock from her uncle valued at $80,000 at the time of his death. The original purchase price of the stock was $30,000. If Christine sells the stock for $85,000, what is her capital gain or loss?

A. $5,000 gain
B. $55,000 gain
C. No gain or loss
D. $50,000 loss

Answer 18

A. $5,000 gain

Inherited property receives a “step-up” in basis to the fair market value at the time of the original owner’s death. Therefore, Christine’s basis in the stock is $80,000. If she sells the stock for $85,000, her capital gain is $85,000 - $80,000 = $5,000.
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E.41 Tax consequences of property transactions*

Question 19

David exchanges an old business vehicle (Vehicle A) with a basis of $20,000 for a new business vehicle (Vehicle B) valued at $50,000, paying an additional $30,000 in cash. What is the basis of Vehicle B?

A. $20,000
B. $50,000
C. $30,000
D. $80,000

Answer 19

D. $80,000

In a like-kind exchange where additional cash is paid (boot), the basis of the new property is the basis of the old property plus the boot paid. Here, the basis of Vehicle B will be $20,000 (basis of Vehicle A) + $30,000 (cash paid) = $50,000.

*E.41 Tax consequences of property transactions
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Question 20

Emily sells a piece of artwork, a capital asset, for a $3,000 loss. She originally purchased the artwork for $13,000. How should Emily treat this loss on her tax return?

A. Deduct the loss from her ordinary income
B. Report the loss and carry it forward to the next tax year
C. Deduct the loss against other capital gains, and if any loss remains, up to $3,000 can be deducted from ordinary income
D. Ignore the loss, as losses on personal-use property are not deductible

Answer 20

D. Ignore the loss, as losses on personal-use property are not deductible

Losses on the sale of personal-use property are not deductible for tax purposes. Since the artwork is a capital asset likely held for personal use, Emily cannot deduct the loss on her tax return.

E.41 Tax consequences of property transactions

Question 21

A donor gifts appreciated stock worth $50,000 to a donee. The donor’s original basis was $30,000. Which of the following statements is most correct regarding future tax implications for the donee?

A. The donee will pay income tax on the $50,000 value
B. The donee will pay capital gains tax based on the donor’s $30,000 basis if the stock is sold
C. The donor must pay income tax on the $20,000 appreciation at the time of the gift
D. The donee will receive a step-up in basis to $50,000 when selling the stock

Answer 21

B. The donee will pay capital gains tax based on the donor’s $30,000 basis if the stock is sold

The donee takes on the donor’s original basis of $30,000. If the donee sells the stock, they will owe capital gains tax based on the difference between the sale price and the $30,000 original basis, not on the gift value. The donee does not receive a step-up in basis for gifted property.

E.41 Tax consequences of property transactions

Question 22

Maria gifts her niece, Sofia, a piece of real estate that has appreciated from $150,000 to $250,000. Maria’s original basis was $150,000. If Sofia later sells the property for $300,000, how much of the sale will be subject to capital gains tax?

A. $50,000
B. $100,000
C. $150,000
D. $200,000

Answer 22

B. $100,000

Sofia takes on Maria’s basis of $150,000 when she receives the gift. If she sells the property for $300,000, the capital gain is calculated based on the difference between the sale price ($300,000) and the original basis ($150,000), resulting in a $150,000 gain. However, $100,000 of this is subject to capital gains tax because it represents the appreciation beyond the original basis.

E.41 Tax consequences of property transactions