Income Tax Planning | Lesson 1: Property Taxation Flashcards
Sydney and Kevin were married last year. They decided to live in Kevin’s home after they were married. Kevin has lived and owned the house for five years. Sydney has lived there for nine months. They have sold the home because Kevin’s job transferred him to another state. Kevin’s basis in the house is $400,000, and the fair market value is $1,000,000. What gain will be recognized on the sale of the home?
a) $100,000
b) $256,250
c) $412,500
d) $600,000
Answer: C
The worthless stock is long-term because it is considered worthless as of the last day of the year in which it became worthless. Section 1244 allows the taxpayer to deduct up to $50,000 of loss on 1244 stock against ordinary income. The remaining amount will be capital loss; in this case, the loss is long-term. Therefore, there is $62,000 of LT loss ($12,000 + $50,000)
Faith owned ABC securities. She paid $5,000 for her shares and sold them for $7,000. Twenty days later, she purchased identical shares for $6,500. Which of the following is true?
a) The wash sale rules will apply.
b) The stock will receive Section 1244 treatment.
c) The stock will receive like-kind treatment.
d) Faith’s basis in the new shares is $6,500
Answer: D
The wash sale rules will not apply because the stock was not sold for a loss. The shares do not receive Section 1244 treatment because there is no indication that this is Section 1244 stock, and the shares were not sold for a loss. Securities are not, by statute, like-kind assets. Faith’s basis will be what she paid for the new share ($6,500).
Sydney and Kevin were married last year. They decided to live in Kevin’s home after they were married. Kevin has lived and owned the house for five years. Sydney has lived there for nine months. They have sold the home because Kevin’s job transferred him to another state. Kevin’s basis in the house is $400,000, and the fair market value is $1,000,000. What gain will be recognized on the sale of the home?
a) $100.000
b) $256.250
c) $412.500
d) $600,000
Answer: B
Each spouse is entitled to a $250,000 exclusion of gain if they meet the ownership and use rules. Only one spouse is required to own the home for 2 of the last five years; however, each must use the house for 2 out of the previous five years. If the time frame is not met, a partial exclusion is available if the move was due to a job change or other unforeseen circumstances. In this case, Kevin qualifies for the complete $250,000 exclusion. Sydney is entitled to 9/24 of the exclusion = $93,750. The gain is $1,000,000 - $400,000 basis - $250,000 Kevin’s exclusion - $93,750 Sydney’s exclusion = $256,250.
Which of the following is a Section 1231 asset?
a) Machine used in a business, purchased six months ago.
b) Land used in a business purchased ten years ago.
c) Inventory of a business.
d) Accounts receivables of a business
Answer: B
A Section 1231 asset is a depreciable or real property used in a trade or business held for greater than one year. Inventory and accounts receivables are ordinary income assets. The machine was purchased less than one year ago.
Ben sold some land to his brother Logan on January 1 of the current year. Ben had a basis in the land of $40,000. Ben sold the land to Logan for $240,000. Logan could not afford to pay for the land outright, so Ben agreed to sell the property using an installment sale. Logan will pay $2,000 per month for ten years plus an applicable interest rate. Six months after Logan purchased the land, Logan sold the property for $300,000. How much gain will Ben recognize in the current year if 12 payments were made?
a) $4.000
b) $20,000
c) $200.000
d) $260.000
Answer: C
Since Ben and Logan are related parties, the entire gain must be recognized in the current year because Logan sold the property within two years. Therefore, Ben must recognize a gain of $200,000. Otherwise, the installment treatment would have been allowed. The installment treatment would have been: (Total gain/sales price) x payments = recognized gain. ($200,000 ÷ $240,000) x $24,000 = $20,000.
