REG R3 Flagged Questions #18 Flashcards
MCQ-06907 A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home for $650,000 and paid $36,000 in real estate commissions. What gain should the couple recognize on their joint return? 1. $0 2. $60,000 3. $274,000 4. $310,000
Choice “1” is correct. The sale of the taxpayer’s personal (primary or principal) residence is subject to an exclusion from gross income for gain of $500,000 married filing joint or $250,000 single. To qualify, the taxpayer must have owned and used the property as a principal residence for two years or more during the five year period ending on the date of the sale or exchange.
Taxpayer’s Basis:
300,000
Purchase price
40,000
Improvements
36,000
Real estate commissions
376,000
Ending basis
Sales Price:
650,000
Gain on sale:
274,000
Under allowed $500,000 exclusion for married couple
Choice “2” is incorrect based on the above calculation.
Choice “3” is incorrect. $274,000 is the realized gain, yet it does not need to be recognized.
Choice “4” is incorrect based on the above calculation.
MCQ-02197
With regard to depreciation computations made under the general MACRS method, the half-year convention provides that:
1. 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 is allowed for the year in which the property is disposed
of.
2. Depreciation will be allowed in the last year of the property’s economic life only if the property is disposed of after June 30 of the year of disposition for calendar-year corporations.
3. Depreciation will be allowed in the first year of acquisition of the property only if the property is placed in service no later than June 30 for calendar-year corporations.
4. The deduction will be based on the number of months the property was in service, so that one-half month’s depreciation is allowed for the month in which the property is placed in service and for the month in which it is disposed of.
Choice “1” is correct. 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 is 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.
Choices “4”, “3”, and “2” are incorrect, per the above explanation.
MCQ-08440
Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of
$70,000, for $165,000. Baker owned and lived in the residence for seven years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker’s recognized gain?
1. $85,000
2. $95,000
3. $0
4. $84,000
Choice “3” is correct. This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two of the last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $85,000 ($165,000 selling price – $70,000 adjusted basis – $10,000 selling expenses). All of the realized gain is excluded, and none of it is recognized.
Choice “1” is incorrect. $85,000 is the realized gain. But none of the gain is recognized, due to the homeowner’s exclusion.
Choice “2” is incorrect. $95,000 is the realized gain before considering the selling expenses. But none of the gain is recognized, due to the homeowner’s exclusion.
Choice “4” is incorrect. $84,000 is the realized gain of $85,000 less $1,000 of fix-up expenses, which do not reduce the realized gain. But none of the gain is recognized, due to the homeowner’s exclusion.
MCQ-06883
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex
include in gross income for the year of sale?
1. $20,000
2. $5,000
3. $25,000
4. $15,000
Choice “2” is correct. Under the installment method, revenue is reported (recognized) over the period in which the cash payments are received. Included gross income is determined in 3 steps:
Step 1: Gross Profit:
Sale on Installment
100,000
Cost
80,000
Total Gross Profit
20,000
Step 2: Gross Profit Percentage:
Gross Profit/Sale on Installment ($20,000/$100,000) = 20%
Step 3: Taxable Gross Profit:
Collections ($25,000) x Gross Profit Percentage (20%) = $5,000
MCQ-06905 A taxpayer purchased five acres of land for $20,000 and placed in service other tangible business assets that cost $100,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $1,000,000, what maximum amount of cost recovery can the taxpayer claim this year? 1. $108,000 2. $120,000 3. $100,000 4. $20,000
Choice “3” is correct. Under the election to expense certain depreciable business assets (sec. 179), the taxpayer may expense the cost of the depreciable asset up to the limitation, in this example $1,000,000. Therefore, only the cost of the depreciable tangible business assets can be expensed ($100,000).
Choice “1” is incorrect. Taxpayer can only expense up to the purchase price, not to exceed the limitation.
Choice “2” is incorrect. Land is not a depreciable asset.
Choice “4” is incorrect. Land is not a depreciable asset.
MCQ-14927 In the current year, Madison inherited investment property from a parent's estate with a fair market value of $200,000. The parent had a basis in the asset of $100,000. Madison sold the property for $150,000 in the year the parent died. What is Madison's gain or loss on the sale? 1. $50,000 long-term loss 2. $50,000 short-term loss 3. $50,000 long-term gain 4. $50,000 short-term gain
Choice “1” is correct. A taxpayer’s basis in inherited property is generally the fair market value of the property at the date of death, in this case $200,000. The holding period of inherited property is automatically long-term regardless of how long the property was actually held. $150,000 sales price − $200,000 basis = ($50,000) long-term loss.
Choice “2” is incorrect. The amount of the gain or loss is a $50,000 loss ($150,000 sales price − $200,000 basis), but the loss is long-term, not short-term. The holding period for the sale of inherited property is automatically long-term regardless of how long the property was actually held.
Choice “3” is incorrect. There would be a $50,000 gain if the decedent’s basis of $100,000 was incorrectly used for the basis of the inherited property, rather than the fair market value at date of death of $200,000. The holding period for the sale of inherited property is automatically long-term regardless of how long the property was actually held.
Choice “4” is incorrect. There would be a $50,000 gain if the decedent’s basis of $100,000 was incorrectly used for the basis of the inherited property, rather than the fair market value at date of death of $200,000. The holding period for the sale of inherited property is automatically long-term regardless of how long the property was actually held.
MCQ-14658 In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain? 1. $50,000 2. $150,000 3. $0 4. $100,000
Rule: Nonrecognition treatment is accorded to a like-kind exchange of real property used in a trade or business or held for investment.
Choice “1” is correct. The exchange in this question qualifies for Section 1031 treatment since the exchange appears to be business real property for business real property. However, the boot involved in the exchange (the mortgages) must be taken into account to determine the recognition or nonrecognition of the gain realized on the exchange. In this transaction, the total consideration received by Tatum is the FMV of the property received of $350,000 plus the mortgage of $120,000 that was assumed by the other party, for a total of $470,000. The adjusted basis of the property given up was $250,000, and there is also $70,000 of mortgage given up by the other party (and assumed by Tatum), for a total of $320,000. The realized gain is thus $470,000 − $320,000 = $150,000. The recognized gain will be the lesser of realized gain or boot received. If there is both debt relief and debt assumed in a like-kind exchange, you “net the debt.” Net debt assumed is boot paid and net debt relief is boot received. Tatum was relieved of $120,000 debt on the farmland given up, and assumed $70,000 debt on the office building received. $120,000 debt relief – $70,000 debt assumed = $50,000 net debt relief, which is boot received. Therefore, Tatum will recognize $50,000 of the $150,000 realized gain.
Choice “2” is incorrect. The $150,000 is the total realized gain. Only $50,000 of the realized gain is recognized, and the other $100,000 is deferred.
Choice “3” is incorrect. Gain is recognized to the extent of the boot received.
Choice “4” is incorrect. The $100,000 is the amount of realized gain being deferred, not the recognized gain.
MCQ-04080 Good, a C corporation, sells an automobile to its sole shareholder for $4,500. Good's adjusted basis in the automobile is $12,000, and the fair market value is $5,000. What is the amount of loss that is recognized by Good? 1. $0 2. $7,000 3. $7,500 4. $500
Choice “1” is correct. Taxpayers may not deduct losses on sales of property to related parties. A corporation and a shareholder who owns more than 50% of that corporation are considered related parties.
Choices “4”, “2”, and “3” are incorrect per the explanation above.
MCQ-02194 Joe Hall owns a limousine for use in his personal service business of transporting passengers to airports. The limousine's adjusted basis is $40,000. In addition, Hall owns his personal residence and furnishings, that together cost him $280,000. Hall's capital assets amount to: 1. $280,000 2. $0 3. $40,000 4. $320,000
Choice “1” is correct. Hall’s personal residence and personal furnishings are considered capital assets.
Choice “2” is incorrect. Hall’s personal residence and personal furnishings are considered capital assets.
Choices “4” and “3” are incorrect. Hall’s limousine used in his trade or business is considered a Section 1231 asset. Section 1231 assets are not considered capital assets.
MCQ-06420
A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $18,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer
wants in exchange is only worth $17,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new building, and the taxpayer agrees to pay $1,000 cash in addition to the trade. What is the gain or loss recognized by the taxpayer in this transaction?
1. $0
2. $2,500 gain
3. $3,000 gain
4. $3,500 gain
Calculations for “Recognized Gain with Boot Received and Paid”
Gain/Loss Realized:
Amount realized
=
Fair market value of new building + Boot received − Adjusted basis of building given up
=
$17,500 fair market value new building + $3,500 fair market value of trailer received − $1,000 cash boot paid − $17,000 adjusted basis of the old building ($35,000 cost −
$18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized − Boot received + Boot paid
=
$17,000 + $3,000 − $3,500 + $1,000
=
$17,500
Alternative calculation: $17,500 FMV new property + $0 deferred loss − $0 deferred gain = $17,500 basis of new property.
Choice “3” is correct. A $3,000 gain is recognized (the lesser of $3,000 gain realized and $3,500 fair market value of the trailer boot received).
Choice “1” is incorrect. Gain is recognized on like-kind transactions to the extent of boot received in like-kind transactions.
Choice “2” is incorrect. $2,500 is the difference between the fair market value of the trailer boot received, $3,500, and $1,000 cash boot paid.
Choice “4” is incorrect. $3,500 gain is the greater of the gain realized and boot received, not the lesser of the gain realized and boot received.
MCQ-08459
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?
1. $100,000
2. $150,000
3. $50,000
4. $0
Choice “2” is correct. The building had an adjusted basis of $350,000 and $400,000 proceeds were received for it. That results in a 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).
Choice “1” is incorrect. $100,000 is the taxable amount of the proceeds for lost profits only.
Choice “3” is incorrect. $50,000 is the taxable amount of the proceeds for the building only.
Choice “4” is incorrect. $0 would be the taxable amount just on the building if the gain were deferred.
MCQ-06419
A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $18,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer
wants in exchange is only worth $17,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new building, and the taxpayer agrees to pay $1,000 cash in addition to the trade-in. What is the gain or loss realized by the taxpayer on this transaction?
1. $500 gain
2. $3,000 gain
3. $2,500 gain
4. $2,500 loss
Calculations for “Realized Gain with Boot Received and Paid”
Gain/Loss Realized:
Amount realized
=
Fair market value of new building + Boot received − Adjusted basis of building given up
=
$17,500 fair market value new building + $3,500 fair market value of trailer received − $1,000 cash boot paid − $17,000 adjusted basis of the old building ($35,000 cost −
$18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized − Boot received + Boot paid
=
$17,000 + $3,000 − $3,500 + $1,000
=
$17,500
Alternative calculation: $17,500 FMV new property + $0 deferred loss − $0 deferred gain = $17,500 basis new property.
Choice “2” is correct. A $3,000 gain is realized [fair market value of the new building $17,500 + $3,500 fair market value of the trailer boot received − $1,000 cash boot paid − $17,000 adjusted basis of the old building ($35,000 cost − $18,000 accumulated depreciation)].
Choice “1” is incorrect. $500 would be the gain/loss realized if the boots paid and received were ignored.
Choices “3” and “4” are incorrect. $2,500 is the net value of the boots received and paid ($3,500 fair market value of the trailer received − $1,000 cash boot paid).
MCQ-05549 Rock Crab, Inc. purchases the following assets during the year: Computer $3,000 Computer desk 1,000 Office furniture 4,000 Delivery van 25,000 What should be reported as the cost basis for MACRS five-year property? 1. $33,000 2. $3,000 3. $25,000 4. $28,000
Choice “4” is correct. MACRS 5-year property includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipment, and other such items. The cost basis of the MACRS 5-year property is $28,000, calculated as follows:
Computer
3,000
Delivery van
25,000
MACRS 5-year
28,000
Choice “1” is incorrect. This answer option assumes that all of the assets in the question are MACRS 5-year property. However, the computer desk and the office furniture are MACRS 7-year property, which includes office furniture and fixtures, equipment and property with no ADR midpoint classified elsewhere, and railroad track.
Choice “2” is incorrect. While the computer ($3,000) is included, the delivery van ($25,000) is also 5-year MACRS property.
Choice “3” is incorrect. While the delivery van ($25,000) is included, the computer ($3,000) is also MACRS 5-year property.
MCQ-14926
A taxpayer’s property with an adjusted basis of $75,000 and fair market value of $105,000 was condemned by the state. The taxpayer received $100,000 from the state as compensation for the property, and six months after the condemnation purchased a replacement property for $100,000. What are the tax consequences of this transaction?
1. A gain of $25,000 is recognized, and the basis in the new property is $100,000.
2. No gain is recognized, and the basis in the new property is $75,000.
3. No gain is recognized, and the basis in the new property is $100,000.
4. A gain of $30,000 is recognized, and the basis in the new property is $100,000.
Choice “2” is correct. No gain is recognized and the basis in the new property is $75,000. No gain is recognized on a condemnation of property if the taxpayer reinvests the condemnation proceeds in property that is similar or related in service or use within three years after the close of the tax year in which the gain was realized. The basis of the replacement property is the cost of the property reduced by the amount of any gain realized that is not recognized (deferred).
In this case, the entire condemnation proceeds of $100,000 are reinvested in replacement property. The $100,000 cost basis of the replacement property is reduced by the $25,000 gain not recognized (deferred).
Condemnation proceeds $100,000 Basis in condemned property (75,000) Gain realized 25,000 Gain recognized (0) Gain deferred $ 25,000 Cost of replacement property $100,000 Gain deferred (25,000) Basis of new property $ 75,000 Choice "1" is incorrect. The $25,000 is the difference between the $100,000 condemnation proceeds and the $75,000 adjusted basis of the condemned property, which is the gain realized. None of the gain realized is recognized because all of the condemnation proceeds are invested in replacement property. The basis in the new property is the $100,000 cost reduced by the $25,000 gain not recognized (deferred).
Choice “3” is incorrect. No gain is recognized, but the cost basis of the new property of $100,000 is reduced by the gain not recognized (deferred) of $25,000.
Choice “4” is incorrect. $30,000 is the difference between the condemned property’s $105,000 fair market value and $75,000 adjusted basis. The gain realized is $25,000, which is the difference between the $100,000 condemnation proceeds and the adjusted basis of the condemned property. The basis in the new property is the $100,000 cost reduced by the $25,000 gain not recognized (deferred).
MCQ-01726
In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000.
What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return?
1. $4,000
2. $5,000
3. $1,000
4. $0
Choice “3” is correct. Losses between related parties are disallowed. Therefore, Fay’s $4,000 capital loss ($15,000 basis less $11,000 received) is disallowed because she sold the stock to her son, a related party. When her son sells the stock to an unrelated party, however, he can use the $4,000 disallowed loss to reduce any gain he realized from the sale (but not to create or increase a loss). His realized gain is $5,000 ($16,000 received less $11,000 basis), but he can reduce it by $4,000 to $1,000 using his mother’s disallowed loss. Martin sold the stock for higher than Fay purchased it. The donor’s basis ($15,000) is, therefore, used to determine gain on the sale by Martin.
Choice “1” is incorrect. The $4,000 disallowed loss to his mother reduces his $5,000 gain.
Choice “2” is incorrect. The $5,000 gain is reduced by his mother’s $4,000 disallowed loss.
Choice “4” is incorrect. Martin’s gain, after reducing it by his mother’s disallowed loss, is reported on his tax return.
