Property Transactions - 1

Question 1

The sale of what type of business property should be reported as section 1231 property?

Answer 1

Land held for 18 months b/c it’s business property held for more than one year

Question 2

For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?

Answer 2

Marketable securities are an investment that qualifies as a capital asset

Question 3

Which of the following would be considered capital assets: limousine used for business, personal residence and it’s furnishings

Answer 3

personal residence and furnishings.
Capital assets are all assets owned by taxpayer EXCEPT 1221 assets: inventory, account receivable, depreciable property and real property used in business

Question 4

Time frame of alternate valuation date for an estate

Answer 4

6 months after death

Question 5

Donees basis of stock bequeathed due to death

Answer 5

fmv at date of death

Question 6

wash sale

Answer 6

can be used to offset loss of stock if purchased within 30 days before sale. only applies to amount of stock purchased in that time frame.
Ex. 2/1/15 purchased 500 shares for $50, 5/1/15purchased 100 shares for $45, 5/15/15 sold all 500 for $48. 100 of those shares can be used as “wash sale”

Question 7

is holding period of gifts transferred to donee

Answer 7

yes.

Question 8

calculation of new basis for jointly owned property when one spouse dies

Answer 8

(original basis/2) + (fmv at death/2)

Question 9

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

Answer 9

$60,000. The 1245 recapture is limited to amount of depreciation taken

Question 10

1231 assets

Answer 10

assets that have been used in a business

Question 11

lookback provision (section 1231)

Answer 11

The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income

Question 12

On August 22, 2015 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2015 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale?

Answer 12

Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.

Question 13

Taxation of gain on sale of reality

Answer 13

Gain on the sale of realty is taxed at a 25% rate to the extent of the straight-line depreciation claimed on the asset

Question 14

ordinary business assets

Answer 14

inventory and accounts receivable

plus depreciable property held for less than one year

Question 15

1231 business assets

Answer 15

Depreciable property used in a trade/business and realty that have been owned for more than a year are Section 1231 assets
ex. equipment, factory, unimproved land(non investment)

Question 16

section 1250 assets

Answer 16

Depreciable realty is Section 1250 property. Realty is land and buildings. For Section 1250 property, only the excess of actual depreciation over straight-line depreciation is subject to recapture as ordinary income.
The amount subject to the 25% rate is usually the straight-line depreciation on the asset.

Question 17

Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:

Personal use. 25%
Investment use. 30%
Business use. 45%

Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?

Answer 17

A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.

Question 18

Browne, a self-employed taxpayer, has 2015 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2015, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2015 capital expenditure.

Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (assumed to be $25,000 ignoring bonus depreciation). Browne is not a member of any pass-through entity.

What is Browne’s deduction under the election?

Answer 18

Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $25,000 for 2015. The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000. Since Browne purchases the equipment for use in business, the property qualifies as Code-Section 1245 property and, therefore, is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.

Question 19

In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of

Answer 19

Rental real estate located in different states

Exchanges involving property held primarily for sale; stocks, bonds, notes and other securities; partnership interests; certificates trusts or beneficial interest; and evidences of indebtedness are not considered “like-kind” exchanges and, as a result, do not qualify for the non-recognition of gains or losses.

Question 20

Gross profit on sale of property

Answer 20

amount realized - adjusted basis

Question 21

installment method

Answer 21

1. Basis in building = original cost-depreciation
2. Gain = sale price - basis
3. % of payments received = Current years payment/sale price
4. Gain recognized = #2 x #3

Question 22

Related parties

Answer 22

Losses from sales and exchanges made by related parties are not recognized for tax purposes. A taxpayer’s brothers and sister (whole and half blood), spouse, ancestors and lineal descendants are considered related parties. A taxpayer’s in-laws are not considered members of his/her family