REG 3 - Property Taxation

Question 1

On June Y9, Hall’s mother gifted her 100 shares of listed stock. The donor’s basis for this stock, which she bought in Y1 was $4K, and the market value on the date of the gift was $3K. Hall sold the stock in July for $3.5K, what is the reportable gain or loss for Hall as a result of the sale?

Answer 1

it would be $0.

If the property is sold at a gain, the basis to the donee is the same as it would be in the hands of donor, if the property is sold at a loss, the basis to the donee is the same as it would be in the hands of the donor OR the FV of the property at the date of the gift, whichever is lower.

Question 2

Buff purchased equipment for business use for $36K. After deducting $5K for depreciation, Buff gave the equipment to Russett for business use. As the time of the gift was made, the equipment FMV is $32K. Ignoring gift tax consequence, what is Russet’s basis in the equipment?

Answer 2

it would be $31K.

Generally speaking, the basis of a gift received is equal to the donor’s basis.

Question 3

What is the holding period for inherited property?

Answer 3

It is automatically long-term for inherited property regardless of how long the property was held

Question 4

What is the de minimis safe harbor rule?

Answer 4

this allows a company to immediately deduct low cost personal property items for tax purposes. A tax payer can deduct up to $5K per item if they have applicable financial statement (AFS). If they don’t have AFS then they are only allowed to deduct $2.5K.

AFS generally means audited financial statements.

Question 5

What is the holding period for a gifted item?

Answer 5

the holding period does not change when the item is gifted.

Question 6

In a like kind exchange what is the gain recognized?

Answer 6

it is the lesser of the realized gain or the boot received

Question 7

Like kind exchange:

Taxpayer owns RE $40K FMV and $25K adj basis
exchanged for property with $35K FMV and $5K Cash received

What is the gain recognized & realized?

What is the basis in the property?

Answer 7

The gain realized is $15K ($40K proceeds minus $25K adj basis)

The gain recognized is $5K, with $10K gain being deferred

The basis in the new property is $25K. FMV of new property ($35K) minus the deferred gain ($10K) plus deferred loss ($0K).

Question 8

For a like kind exchange how do you calculate the basis in the property received?

Answer 8

The new basis is:

FMV of the new property
Minus: deferred gain
Plus: deferred loss

**if NON-TAXABLE use the NBV

Question 9

Like kind exchange:

Taxpayer owns RE $35K FMV and $17K adj basis
exchanged for property with $20K FMV

What is the gain recognized & realized?

What is the basis in the property?

Answer 9

The gain realized is $3K ($20K proceeds minus $17K adj basis)

The gain recognized is $0K, not BOOT

The basis in the new property is $17K. FMV of new property ($20K) minus the deferred gain ($3K) plus deferred loss ($0K).

Question 10

Like kind exchange:

Taxpayer owns RE $35K FMV and $23K adj basis
exchanged for property with $20K FMV

What is the gain/loss recognized & realized?

What is the basis in the property?

Answer 10

The realized gain loss is $3K ($20K proceeds minus $23K adj basis)

The loss recognized is $0K, loss never recognized!

The basis in the new property is $23K. FMV of new property ($20K) minus the deferred gain ($0K) plus deferred loss ($3K).

Question 11

Like kind exchange:

Taxpayer owns RE $35K FMV and $17K adj basis
exchanged for property with $16.5K FMV plus $3.5K Cash received

What is the gain recognized & realized?

What is the basis in the property?

Answer 11

The gain realized is $3K ($20K ($16.5K+$3.5K) proceeds minus $17K adj basis)

The gain recognized is $3K, lessor of realized gain of $3K or boot of $3.5K

The basis in the new property is $16.0K. FMV of new property ($16.5K) minus the deferred gain ($0K) plus deferred loss ($0K).

Question 12

Like kind exchange:

Taxpayer owns RE $35K FMV and $17K adj basis
exchanged for property with $17.5K FMV plus $2.5K Cash received

What is the gain recognized & realized?

What is the basis in the property?

Answer 12

The gain realized is $3K ($20K ($17.5K+$2.5K) proceeds minus $17K adj basis)

The gain recognized is $2.5K, lessor of realized gain of $3K or boot of $2.5K; there will be a deferred gain of $0.5K

The basis in the new property is $17.0K. FMV of new property ($17.0K) minus the deferred gain ($0.5K) plus deferred loss ($0K).

Question 13

Like kind exchange:

Taxpayer owns RE $35K FMV and $17K adj basis & $2K cash paid exchanged for property with $22K FMV

What is the gain recognized & realized?

What is the basis in the property?

Answer 13

The gain realized is $3K ($22K proceeds minus $19K adj basis)

The gain recognized is $0K, lessor of realized gain of $3K or boot of $0K

The basis in the new property is $19.0K. FMV of new property ($22.0K) minus the deferred gain ($3.0K) plus deferred loss ($0K).

Question 14

Like kind exchange:

Taxpayer owns RE $35K FMV and $17K adj basis & $5K debt exchanged for property with $18K FMV $3K debt

What is the gain recognized & realized?

What is the basis in the property?

Answer 14

The gain realized is $3K ($20K ($18K + $2K net debt( proceeds minus $17K adj basis)

The gain recognized is $2K, lessor of realized gain of $3K or boot of $2K, net debt

The basis in the new property is $17.0K. FMV of new property ($18.0K) minus the deferred gain ($1.0K) plus deferred loss ($0K).

Question 15

What is a 1231 asset?

Answer 15

they are depreciable personal property and real property in a business and held for over 12 months.

**land is included in this even though it is not depreciable

Question 16

Bates Corp purchased and placed into service a 7 year MACRS tangible property costing $100K. A year later Bates sold the property for $102K, after taking $47K in MACRS depreciation deductions. What is the 1231 gain and what is the 1245 gain/ordinary income recaptured?

Answer 16

$47K is the 1245 gain/ordinary income recaptured

$2K is the 1231 gain

Question 17

What are the capital loss rules for the following:

1. Individuals
2. Corporations

Answer 17

1. Individuals can only offset $3K of capital losses against income. They cannot carryback the losses but can carry forward indefinitely.
2. Corporate capital losses cannot offset capital losses against ordinary income. Can carry back 3 years and carry forward 5 years

Question 18

What is the tax treatment for Y7?

Y1: bought land for $100K
Y3: Net 1231 loss of $30K
Y7: Sold land for $150K

Answer 18

The overall gain is $50K on the sale on land in Y7. However, according to the Section 1231 Five-Year Look-back rule, the $30K net 1231 loss which was treated as ordinary income in Y3 but be “paid back” in Y7. As such, $30K will be ordinary income and $20K will be long term capital gain

Question 19

What is the tax treatment for a net 1231 loss?

Answer 19

if the combined 1231 gain and losses for the tax year result in a net 1321 loss, the loss is considered ordinary loss

Question 20

What are the recapture rules for section 1245 properties?

Answer 20

When the asset is sold:

the lesser of gain recognized or accumulated depreciation taken on the asset is recaptured as ordinary income under 1245,

any remaining gain is 1231 gain

Question 21

What are the section 1250 rules?

Answer 21

Section 1250 only recaptures the depreciation taken on real property in excess of straight-line; only applicable to pre 1987 accelerated methods of depreciation

Question 22

What are the section 291 rules?

Answer 22

this only applies to corporations, where an asset is sold at a gain. The amount re-captured as ordinary income is equal to 20% of the lesser of the recognized gain or the accumulated SL depreciation taken on the asset.

Any remaining gain is considered 1231 gain

Question 23

What is the tax treatment for Lancaster?

Y1: bought equipment for $100K
Y3: Sold the same equipment $95
Accumulated depreciation was $30K

Answer 23

The adjusted basis was $70K, Recognized gain on the sale is $25K ($95K - $70K). This $25K will be treated as ordinary income gain as it is the lesser of $25K vs the $30K of A/d. No section 1231 gain.

Question 24

Lancaster, C Corp, owned a building with an original cost basis of $100K and SL A/D of $15K. Lancaster sold the building for $95K.

What is the Section 291 gain?

Answer 24

The recognized gain on the sale of the building is $10K ($95K - $85K). Of this $10K, the amount recnognized as ordinary income is 20% of the lesser of $10K (gain recognized) or $15K (A/D). As such ordinary income is 20% of $10K = $2K, the remaining $8K will be a 1231 gain.

Question 25

In 2021, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,621,000. What portion of the cost may Roe elect to treat as a Sec. 179 expense rather than as a capital expenditure?

Answer 25

A taxpayer may treat up to $1,050,000 of the cost of Sec. 179 property acquired during 2021 as an expense rather than as a capital expenditure. The amount deductible under Sec. 179 must be reduced by the amount by which the cost of Sec. 179 property placed in service during the year exceeds $2,620,000. Thus, $1,050,000 is reduced by $1,000 ($2,621,000 – $2,620,000) to find the allowable Sec. 179 deduction.

Question 26

On March 10, Year 6, James Rogers sold 300 shares of Red Company common stock for $4,200. Rogers had acquired the stock in Year 1 at a cost of $5,000. On April 4, Year 6, he repurchased 300 shares of Red Company common stock for $3,600 and held them until July 18, Year 6, when he sold them for $6,000. How should Rogers report the above transactions for Year 6?

Answer 26

The sale of stock on March 10 was a wash sale because identical stock was repurchased within 30 days. The $800 loss realized in March will not be recognized for tax purposes. The disallowed loss is added to the basis of the stock that is subsequently purchased in April. The basis in the stock purchased in April is $4,400 ($3,600 cost + $800 disallowed loss), and a gain of $1,600 is recognized when the stock is sold for $6,000 on July 18. The gain is long-term because the holding period of stock acquired in a wash sale includes the holding period of the originally purchased stock.

Question 27

Crudd owned a building with an adjusted basis of $400K. The state condemned it and awarded him $450K. Crudd bought a new building for $440K. What is the gain realized, gain recognized, and the basis in the new building?

Answer 27

The gain realized is $50K ($450K - $400K)

The gain recognized is $10K ($450K - $440K)

the basis in the new building is $400K

Cost of new building $440K
minus: gain not recognized -$40K
= basis of new building

Question 28

Relating to wash sale loss, what is the basis of the repurchased security?

Answer 28

it is the purchase price plus the disallowed loss

Question 29

is a copyright a 1231 asset?

Answer 29

no it isnt, intangible assets are not 1231 assets

Question 30

A TP sold $200K equipment that had an adjusted basis of $180K. The TP has deducted $30K in depreciation. What is the amount of 1245 gain to be recaptured?

Answer 30

The amount of gain to be recaptured is $20K. Section 1245 only requires the lesser of the depreciation taken ($30K) or the gain recognized ($20K).

Question 31

In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?

Answer 31

$50,000 ordinary loss and $18,000 capital loss.

Up to $50,000 of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. This limit applies to Sec. 1244 stock held in all corporations. The remaining $18,000 ($48,000 + $20,000 – $50,000) is a capital loss.

Question 32

Bob sold securities in Year 1. The sales resulted in a capital loss of $7,000. He had no other capital transactions. He and his wife Gloria decide to file separate returns for Year 1. His taxable income was $26,000. What amount of capital loss can he deduct on his Year 1 return and what amount can he carry over to Year 2?

Answer 32

$1,500 in Year 1 and $5,500 carry over to Year 2.

If capital losses exceed capital gains for the tax year, the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return). Thus, Bob will deduct $1,500 in Year 1, and carry over $5,500 to Year 2.

Question 33

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on

Answer 33

the last day of the current taxable year. Not the date it is deemed to be worthless as this date is hard to determine

Question 34

Jack had the following items of income and loss in Year 7:

• Wages - $122,500
• Nonbusiness bad debt - $1,500
• Gain on stock held since Year 5 - $2,500
• Flood loss to his personal residence located in a federally declared disaster area owned since Year 1 - $4,100
• Loss on stock held since Year 4 - $500
• Gain on stock held for 4 months - $2,000

What is his total taxable capital gain or total deductible capital loss for Year 7?

Answer 34

$2,500 gain.

Nonbusiness bad debts are treated as short-term capital losses under Sec. 166. The flood loss is an itemized deduction, not a capital loss.

Question 35

As of beginning of Year 3, Wolf Inc has a written accounting policy to expense amounts paid for tangible personal property costing up to $8K. Wolf does not have an applicable financial statement for the year. During Year 3, Wolf pays $12K for three pieces of office furniture that cost $4K each and have an economic life of five years. Under the de minimis safe harbor rule, how much can Wolf deduct for tax purposes?

Answer 35

0. the limit is $2.5K if there are no applicable financial statements. the item needs to cost $2.5K or less to deduct

Question 36

A taxpayer’s property with an adjusted basis of $75K and FMV of $105K was condemned by the state. The taxpayer received $100K from the state as compensation for the property, and six months after the condemnation purchased a replacement property for $100K. What is his tax basis in the new property and the gain reported?

Answer 36

The tax basis is $75k in the new property and there is no gain recognized as the taxpayer purchased a new property within three years after the tax year.

Question 37

Dawson Inc’s warehouse (with AB if $75K) was destroyed by fire. The following year, Dawson received insurance proceeds of $195K and acquired a new warehouse for $167K. Dawson elected to recognize the minimum gain possible. What is Dawson’s basis in the new warehouse? What is the gain recognized?

Answer 37

$75K is the new basis. $167K - $92K gain not recognized

The gain recognized is $28K. $195K - $167K

Question 38

On Year 1, Janice had the following transactions in BVS stock:

Jan 1 - Bought 500 shares, $25 a share
May 12 - Sold 500 shares, $23 a share
May 28 - Bought 250 shares, $22 a share
Oct 15 - Sold 100 shares, $18 a share

What is Janice’s deductible loss?

Answer 38

it would be $1,000 due to the wash sale rules.

May 12 Sales. Shares that were not repurchased:
250 shares x sale price of $23/share = $5,750
250 shares x purchase price of $25/share = ($6,250)
Loss ALLOWED on May 12 Sale = $500

Oct 15 sale of 100 shares
100 shares x sale price of $18 a share = $1,800
100 shares x basis of $24* a share = ($2,400)
Loss on Oct 15 Sale = $600

Total deductible loss is $1,100

*basis is increased by $2 a share

Question 39

A taxpayer purchased a forklift for use in the taxpayer’s business for $20K on Jan 1 of the current year. The tax payer sold the forklift on Jun 1 of current year for $22K. What is the taxpayer’s section 1231 gain as a result of the sale?

Answer 39

the 1231 gain is 0 bc the asset wasnt held for more than 1 yr. it will be an ordinary gain of $2K

Question 40

An individual acquired 500 shares of stock on dec 20, Y1 for personal portfolio. On March 15, Y2 the individual executed a short sale of 500 shares of stock. On Dec 21, Y2, the individual delivered the 500 shares to cover a short sale. What is the treatment of the gain or loss on the short sale?

Answer 40

The transaction will be treated as short term capital asset sale.

The holding period is based on when the short is executed, not on the closing date. The taxpayer acquired the stock on Dec 20 and executed the short sale on March 15, which is less than a year

Question 41

Gibson purchased stock with a FMV of $14K from Gibson’s adult child for $12K. The child’s cost basis in the stock at the date of sale was $16K. Gibson sold the same stock to an unrelated party for $18K. What is Gibson’s recognized gain from sale?

Answer 41

it would be $2K. Since the sale price of $18K is higher than the child’s original basis of $16, the taxpayer will use $16K.

Question 42

How is goodwill and other intangible assets (incld. non competes) amortized?

Answer 42

They are amortized straightline over 15 years (180 months)

Question 43

On August 1, Y1, Graham purchased and placed into service an office building costing $264K, including $30K for the land. What was Graham’s MACRS deduction for the office building in Y1?

Answer 43

It was $2.25K.

Office buildings and warehouses have a 39 year useful life. Also need to remember to use the mid month convention.

Question 44

Two transactions for a sole proprietorship were made during the current year. These were the only sales or exchanges of capital assets or Sec. 1231 assets (there were no unrecaptured Sec. 1231 losses from the previous year).

A machine used in the business was sold for $400,000. It cost $330,000 when purchased 3 years ago, and its adjusted tax basis when sold was $210,000. Depreciation had been recorded on an accelerated basis; straight-line depreciation would have been $99,000.

A $500,000 insurance recovery on a small warehouse destroyed by fire was received. It was used in the business and depreciated using the straight-line method. Its adjusted tax basis at the date of the fire was $524,000. A new warehouse was rebuilt at a cost of $600,000.

What is the combined tax effect of these two transactions on the proprietor’s Form 1040?

Answer 44

$70,000 long-term capital gain and $96,000 ordinary income.

**Under Sec. 1231(a), if losses on business property from involuntary conversions by casualty or theft exceed such gains, they are not netted with other Sec. 1231 capital gains. The $24,000 loss will be treated as an ordinary loss and netted with the $120,000 of Sec. 1245 ordinary income for a total of $96,000. The $70,000 of Sec. 1231 gain will be treated as long-term capital gain.

Question 45

Mary Brown purchased an apartment building on January 1, 2011, for $200,000. The building was depreciated using the straight-line method. On December 31, 2021, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $160,000. On her 2021 tax return, Brown should report

Answer 45

Section 1231 gain of $10,000 and Sec. 1250 unrecaptured gain of $40,000.

** Sec. 1250 unrecaptured gains tax rate is 25%

Question 46

During the current year, a corporation retired obsolete equipment purchased ten years ago having an adjusted basis of $30,000 and sold it as scrap for $1,000. The corporation also had $50,000 taxable income from operations. The taxable income of the corporation was

Answer 46

$21,000.

The corporation realized a loss of $29,000 ($1,000 realized – $30,000 adjusted basis) on the sale of the retired equipment for scrap. This is a Sec. 1231 loss. Since there are no other Sec. 1231 gains or losses to net, it is treated as an ordinary loss. Taxable income is

Question 47

Leker exchanged a building that was used exclusively for business and had an adjusted tax basis of $200,000 for a new building. The new building had a fair market value of $100,000, and Leker also received $30,000 in cash. What was Leker’s tax basis in the acquired building?

Answer 47

$170,000

The basis in the new building (the like-kind property) will be the basis of the property transferred ($200,000), minus the amount of boot received ($30,000), or $170,000.

Question 48

Blink Corp., an accrual-basis, calendar-year corporation, has zero tax liability for the tax year ended December 31, Year 1. Blink’s gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 2. Which method(s) of estimated tax payment can Blink use for its quarterly payments during the Year 2 tax year to avoid underpayment of federal estimated taxes?

1. 100%-of-the-preceding-tax-year method; OR,
2. Annualized income method

Answer 48

2. Annualized income method

Blink Corp. qualifies as a small corporation because it has not had taxable income exceeding $1 million during any of the 3 preceding years. However, it must have shown a tax liability in the previous year in order to use the 100%-of-the-preceding-tax-year method. Since the previous year had zero tax liability, this method cannot be used. The annualized income method is available in this situation.

Question 49

On June 1, Year 1, Mr. Smart purchased investment land. On January 31, Year 2, Mr. Smart traded the land plus cash for some other investment land in a non-taxable exchange. On August 15, Year 2, he sold the land received in the non-taxable exchange for a gain. What is the character of Mr. Smart’s gain for Year 2?

Answer 49

If property received in an exchange has the same basis in whole or in part as that of the property given (and if the property given is a capital asset or a Sec. 1231 asset), the holding period of the property received includes the period for which the property given was held. Thus, when the property is sold, the holding period includes the holding period of the property exchanged, and capital assets held more than 1 year are treated as long-term.