R3

Question 1

Gain/Loss Realized

Answer 1

Amount realized (FMV of real property received)
–
Adjusted basis of real property given up (Basis - Accumulated depreciation)
–
Boot paid(liability assumed)

Question 2

Gain/Loss Recognized

The realized gain is recognized up to boot received in cases if Realized gain is more than boot received for like- kind exchanges

Answer 2

Lesser of
Boot received ( Cash and Debt relief)
or
Realised Gain

If there is a Loss - Losses are never recognized for like-kind exchange.

Question 3

Gain Deferred

Answer 3

Gain Realized - Gain Recognized

Question 4

Bais of new property

Answer 4

FMV of property received
(-) Deferred Gain
+ Deferred Loss

Question 5

Inherited Property - Taxpayer’s Basis

Answer 5

FMV of the property at the date of death
(or)

If elected alternate valuation date for distribution , then:-
EARLIER of
six months after date of death
or
date distributed if before six months.

Question 6

Inherited Property - Income Tax

Answer 6

There is no income tax on the value of inherited property.

Question 7

Gifted Property - BASIS

Answer 7

Donor’s Basis = Donee’s Basis—– Applicable when FMV > Basis.
Therefore , sale price - Basis

Exception ==== FMV<Basis

Question 8

Long term Capital Gain/Loss

Answer 8

A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either

1. a long-term capital gain ===if the capital asset is sold at a price greater than acquisition cost
2. long-term capital loss ===if the capital asset is sold at a price less than the acquisition cost

Question 9

Gain recognized on Foreclosure Property

O/S Debt Balance - Borrower’s Basis

Answer 9

Foreclosure of property with a nonrecourse, secured loan is treated as a sale of the property.

It is not cancellation of debt (COD) income because the debtor is not personally liable for the debt.

The amount realized is the amount of the debt immediately prior to the foreclosure

Question 10

Taxpayer - Home owner - Selling Property
Realized Gain ==SP - Basis
Recognized Gain === Realized Gain
-
Excluded Amount of
250,000 if single

Answer 10

1. Should have lived in his home for two years or more out of the five years preceding his sale of his residence,
2. single taxpayer he may exclude up to $250,000 of gain on its sale.

Question 11

Basis to spouse on Divorce property settlement

Answer 11

Recipient Spouse Property == Former spouse Basis
In a divorce property settlement, the recipient spouse’s basis of the investment property is the carryover basis(basis in the hands of the former spouse).

Question 12

Selling stock to related party on loss

Answer 12

Stock sold to the taxpayer’s brother, it is a related party loss and the taxpayer is not allowed to deduct any of the loss.

Question 13

Sec 179 election expense

Answer 13

Under the Section 179 election to expense certain depreciable business assets, the taxpayer may expense the cost of qualifying depreciable property up to the annual limitation amount, which is $1,160,000 in 2023.

Question 14

Half- year convention

Answer 14

The half-year convention provides that one-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation allowed for the year in which the property is disposed of.

This assumes that more than 40 percent of the assets were
not placed in service during the last quarter of the year. If this were the case, the mid-quarter convention would apply

Question 15

Mid-quarter

Data Corp., a calendar year corporation, purchased and placed into service office equipment during November Year 1. No other equipment was placed into service during Year 1. Under the general MACRS depreciation system, what convention must Data use?

Answer 15

When a taxpayer places more than 40 percent of its property (other than certain qualifying real property) into service in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter.

Question 16

Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale,the taxpayer’s depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?

Realized Gain of 27,700 is utilised as Ordinary income 20,700 and LTCG 7000 here

1. Ordinary income =Recaptured
   Depreciation deduction
   = 20,700
2. Remaining is LTCG = 7000

Answer 16

Basis = Purchase price - Accumulated Dep
30,000-20,700 == 9300
Sales Price == 37,000

Realized Gain
when property === Sale proceeds - Basis
is sold = 37,000- 9300
= 27,700

Under Section 1245 (office furniture qualifies as Section 1245 property because it is not real property), the total depreciation deducted will be recaptured as ordinary income, and the remainder (any amount in excess of the original cost) will be Section 1231 (taxed as a long-term capital) gain.

Question 17

Amortization

Answer 17

The following must be must be amortized on a straight-line basis over a 15-year period (180 months) beginning with the month of acquisition.

1. Acquisitions of goodwill,
2. covenants not-to-compete,
   3.Franchises,
3. trademarks, and
4. trade names

Question 18

Capital Losses

Answer 18

Capital Losses offset capital gains. If a Corporation has net capital gains, they are taxed at ordinary corporate income tax rates.

Question 19

Net-Capital Loss Limitation

Answer 19

$3,000.

A deduction for a net capital loss is limited to the
lesser of
1. the net capital loss or
2. $3,000

Question 20

Netting Short-term Capital Gains and Losses

Answer 20

Any short-term capital losses including any STCL carryovers are
1. First offset against any short-term gains taxable at Ordinary Income rates.
2.STCL offset LTCG from 28% rate group
3. STCL offset LTCG from 25% group (Unrecaptured Sec 1250 gains)
4. STCL offset LTCG from 15% group

Question 21

Netting Long-term Capital Gains and Losses

Answer 21

1. If there are any LTCL including any LTCL Carryovers from 28% rate group. they are first offset against
   a). Any net gains from 25% rate group
   b). Any net gains from 15% rate group
2. If there are any LTCL Including any LTCL Carryovers from 15% rate group, they are offset first against
   a) Any net gains from 28% rate group
   b) Any net gains from 25% rate group

Question 22

Exceptions to Capital assets

Answer 22

1.Inventory held for sale to customers in the ordinary course of business.
2.Depreciable property and real estate used in business.
3.Accounts and notes receivable arising from sales or services in the taxpayer’s business.
4.Copyrights, literary, musical, or artistic compositions held by the original artist.(
Exception:
Sales of musical compositions held by the original artist receive capital gain treatment.)
5.Treasury stock.

Question 23

If FMV of the property is lower than the cost basis then there are

Exceptions

Answer 23

1. SP higher than Basis
   Donee’s Basis == Donor’s Basis
2. SP is lower than FMV
   Donee’s Basis == FMV
3. SP is between the FMV and Basis (Fmv is lower than SP and SP lesser than Basis)
   NO GAIN or NON LOSS

Question 24

On August 1, Year 1, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in Year 1?

Answer 24

1. Only the building is depreciable, so the depreciable portion is$264,000 - $30,000 land, for a net of $234,000.
2. The MACRS rules provide a 39-year life, straight-line depreciation, and a “mid-month” acquisition convention that treats the property as acquired in the middle of the month, regardless of the actual date of acquisition.
3. Therefore, the August 1, Year 1, service date provides a half-month’s depreciation for August, plus a full month for September through December, for a total of 4.5 months for Year 1.

($234,000/39 years) × (4.5 months/12 months) = $2,250.

Question 25

Sec 1245 Recapture

Answer 25

Lesser of
1. Depreciation taken
2. Gain recognized (SP - Adj.Basis)

Question 26

MACRS Depreciation for property placed in service after 1986

Answer 26

Salvage Value is ignored for purposes of computing MACRS Deduction

Question 27

Nonbusiness Bad Debt

Answer 27

A nonbusiness bad debt must be totally worthless to be deductible. A nonbusiness is treated as a short-term capital loss in the year the debt becomes totally worthless.

Question 28

Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000.

On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share.

Immediately following the split, the FMV of Prime stock was $62 per share.

On February 1,Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share.

What amount should Allen recognizes long-term capital gain income on his Form 1040,
U.S. Individual Income Tax Return
,for Year 3?

Answer 28

The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received, resulting in the same total basis but a lower basis per share of stock held.

Therefore, Allen’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares).

Therefore, his basis per share decreases from $100/share ($10,000/100) to $50/share ($10,000/200).

Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000.

Calculate his gain as follows:
Amount realized ($65 x 100) 6,500
Adjusted basis (5,000 - calculated above)
(5,000)
Realized & recognized gain
1,500

Question 29

MACRS 5 YEAR PROPERTY

Answer 29

Automobiles
Light Trucks
Computers
typewriters
copiers
duplicating equipments etc

Question 30

On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ Co. for$200 per share. The taxpayer purchased the option for $50,000, which was to remain in effect for six months. The market declined, and the taxpayer let the option lapse on August 1, year 1. The taxpayer would report which of the following as a capital loss on the year 1 income tax return?

Answer 30

An option held by an investor is a capital asset.

A capital asset which is sold or exchanged within one year of acquisition will generate either a short-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a short-term capital loss (if the capital asset is sold at a price less than the acquisition cost).

The cost (or other basis) of worthless stock or securities is treated as a capital losses if they were sold on the last day of the taxable year in which they became totally worthless.

The option’s exercise price is irrelevant with respect to determining loss on account of the lapse of the options.

In this question, the options, which were capital assets purchased for $50,000 on February 1, Year 1, became worthless on the lapse date, August 1, Year 1.

Thus, the$50,000 capital loss is treated as having occurred on December 31, Year 1, the last day of the taxable year in which the options became totally worthless.

Because, as of December 31, Year 1, the options had not been held for more than a year, the $50,000 capital loss will be reported on the income tax return as a short-term capital loss.

Question 31

Example of Like-Kind exchange

Answer 31

Apartment Building for Unimproved land

Real Property exchanged for other real property will be as a like-kind exchange (unless the property is in different countries)

Question 32

Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000.

The insurance proceeds totaled $500,000 as follows:
$400,000 for the building
$100,000 for lost profits during rebuilding

Prime does not defer any gain under the involuntary conversion provisions of Code Sec.1033.

What amount of the insurance proceeds is taxable to Prime?

Answer 32

Adjusted Basis of Building = 350,000
Insurance proceeds = 400,000

Result — Taxable gain of $50,000 because none of it was deferred.

The $100,000 received for lost profits is taxable since profits would have been taxable had they been received.

The total taxable amount is $150,000 ($50,000 +$100,000).