R3: Gains and Losses

Question 1

What is a capital asset?

Answer 1

An asset held for personal use and investment

Question 2

Section 1231 property

Answer 2

“Depreciable personal property” used in a trade or business and held for over 12 months
Excludes intangible assets

Question 3

Accounts receivable

Answer 3

Ordinary asset

Question 4

Investment assets of a taxpayer that are not inventory are

Answer 4

Capital assets

Question 5

Examples of capital assets

Answer 5

• Personal automobile
• Furniture and fixtures of personal home
• Stocks and securities of all types
• Personal property
• Real property not held for trade (land)
• Interest in partnership
• Goodwill
• PURCHASED copyrights, literary, musical or artistic works
• Assets held for investment

Question 6

Examples of assets that are NOT capital assets

Answer 6

• Inventory
• Depreciable personal property used for business
• A/R
• Created copyrights, literary, musical or artistic works
• Treasury stock

Question 7

Options

Answer 7

Are capital assets and generate short-term capital gains or losses

Question 8

Long-term capital loss limit

Answer 8

$3,000 to offset ordinary income, the rest can be carried forward indefinitely

Question 9

Section 1245 gains

Answer 9

Equipment used in trade or business for more than one year

Question 10

Gains on Section 1245 property

Answer 10

Section 1245 gains on sale of equipment are ordinary income to the extent of depreciation or section 179 deduction (depreciation recapture), and the remainder is a section 1231 gain

Question 11

Installment method gain calculation

Answer 11

Sale price
Less: Original price
Less: Depreciation
= Gain on sale

Gross profit percentage = Gain/ Sale price = X

Gain realized in the year of sale = cash received times X

Question 12

Section 1245/1250 Depreciation Recapture

Answer 12

Depreciation claimed on a business assets will be ordinary income when sold, and the difference is a long-term capital gain
1250 is for real property (office buildings)

Question 13

If business asset held for less than 12 months

Answer 13

Ordinary gain

Question 14

Gross profit calculation for installment method

Answer 14

Gross profit = amount realized less selling costs less adjusted basis of the property sold

Question 15

Short sales, capital treatment

Answer 15

short-term capital gain/loss

Question 16

Netting capital gains/losses

Answer 16

• ST capital losses can offset ST and LT gains

- LT gains and losses can only offset LT gains or losses

Question 17

Nonbusiness bad debt, cash basis

Answer 17

The bad debt must be completely worthless and/or unrecoverable in order to be deductible

Question 18

Installment sales between related parties

Answer 18

Are allowed

Question 19

Foreclosure of property

Answer 19

Is nonrecourse debt, meaning that the owner is not personally liable
If the bank forecloses and sells the property, the gain is the amount of debt prior to foreclosure

Question 20

Section 1245 Depreciation Recapture

Answer 20

Lesser of:
Claimed depreciation OR
Gain recognized

Question 21

Loss on the sale of a personal residence

Answer 21

NOT deductible

Question 22

Section 1244 stock

Answer 22

ordinary loss

Question 23

Alternate valuation date, basis

Answer 23

if the alternate valuation date is elected, the basis of inherited property will be based on the earlier of:

• The FMV at the date the property is transferred
• The FMV six months after the date of death

Question 24

Gift tax calculation for basis

Answer 24

Gift tax paid x (Net appreciation/Net appreciation + maximum gift tax)

Question 25

Calculation for involuntary conversion

Answer 25

Reinvested proceeds - old property basis