REG R3 Flagged Questions #21 Flashcards
MCQ-06424
A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real
property the taxpayer wants in exchange is worth $22,000. The taxpayer has agreed to assume a liability of $2,000 in addition to the trade-in. What is the taxpayer’s basis in the new real property received?
1. $22,000
2. $15,000
3. $17,000
4. $19,000
Calculations for “New Basis of Like-Kind Property with Liabilities Assumed (Boot Paid)”
Gain/Loss Realized:
Amount realized
=
[Fair market value of real property received − Liabilities assumed (boot paid)] − Adjusted basis of real property given up
=
($22,000 fair market value new real property − $2,000 liability assumed) − ($35,000 cost of old real property − $18,000 accumulated depreciation)
=
$20,000 − $17,000
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$0 (lesser of realized gain of $3,000 or boot received of $0)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Liabilities assumed (boot paid)
=
$17,000 + $2,000
=
$19,000
Alternative calculation: $22,000 FMV new property − $3,000 deferred gain = $19,000 basis of new property.
Choice “4” is correct. $19,000 is the basis of the new real property [$17,000 adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation) + $2,000 in liabilities assumed (boot paid)].
Choice “1” is incorrect. $22,000 is the fair market value of new real property.
Choice “2” is incorrect. A $15,000 basis would result from the subtraction of the $2,000 liability assumed (boot paid) from the $17,000 adjusted basis of the old real property, rather than from adding it.
Choice “3” is incorrect. $17,000 is the adjusted basis of the old real property ($35,000 cost − $18,000 accumulated depreciation). The liability assumed must also be included in the new basis.
MCQ-06887
Lobster, Inc. incurs the following losses on disposition of business assets during the year:
Loss on the abandonment of office equipment $25,000
Loss on the sale of a building (straight-line
depreciation taken in prior years of $200,000)
250,000
Loss on the sale of delivery trucks 15,000
What is the amount and character of the losses to be reported on Lobster’s tax return?
1. $40,000 Section 1231 loss, $50,000 long-term capital loss.
2. $40,000 Section 1231 loss, $250,000 long-term capital loss.
3. $40,000 Section 1231 loss only.
4. $290,000 Section 1231 loss
Choice “4” is correct. Section 1231 assets are comprised principally of depreciable personal and real property used in the taxpayer’s trade or business and held for over twelve months. Trade or business property and capital assets (held over twelve months) that have been involuntarily converted are also included. All of the assets listed in this problem are Section 1231 assets. Net 1231 losses (Sec. 1231 losses less Sec. 1231 gains) are treated as ordinary losses.
MCQ-14907
Hull and Black are partners in a partnership. Hull has a 60 percent interest in the partnership’s capital and profits. In Year 1, Hull purchased stock for $20,000 and decided to
sell the stock to the partnership at the fair market value of $8,000 in Year 5. What is Hull’s recognized long-term capital loss in Year 5?
1. $7,200
2. $12,000
3. $3,000
4. $0
Choice “4” is correct. Hull owns more than 50 percent of the partnership, so Hull and the partnership are related parties. Hull has a $12,000 realized loss on the sale of the stock to the partnership ($8,000 sales price − $20,000 cost). Because it is a related party loss, the deduction of the loss is disallowed.
Choice “1” is incorrect. $7,200 is 60 percent of Hull’s $12,000 realized loss on the sale of the stock. Hull cannot recognize any of the loss because it is a related party sale.
Choice “2” is incorrect. $12,000 is the amount of Hull’s realized loss on the sale of the stock. Hull cannot recognize any of the loss because it is a related party sale.
Choice “3” is incorrect. $3,000 is the amount of the net capital loss that Hull could deduct if the capital loss was from the sale of stock to an unrelated party.
MCQ-11784 Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified? Land Shed 1. Capital Section 1231 2. Section 1231 Section 1231 3. Capital Capital 4. Section 1231 Capital
Choice “2” is correct. Because the parking lot and the shed are real estate used in a trade or business, they are not capital assets per the definition below.
Note: The parking lot and shed will fall under Section 1231 (provided they are used in the business over 12 months) and possibly Section 1250 upon sale of the assets.
Capital assets are defined as all property held by the taxpayer, except:
Inventory held for sale to customers in the ordinary course of business.
Depreciable property and real estate used in business.
Accounts and notes receivable arising from sales or services in the taxpayer’s business.
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.)
Treasury stock.
Choices “3”, “4”, and “1” are incorrect, per the above rule.
MCQ-08963
A taxpayer owned a rental home with an $85,000 fair market value, a $70,000 adjusted basis, and a $60,000 mortgage. The taxpayer exchanged the home for $12,000 in cash plus a rental property with a $65,000 fair market value and a $52,000 mortgage. What
amount of gain, if any, must be recognized by the taxpayer on the exchange?
1. $12,000
2. $0
3. $8,000
4. $15,000
Choice “4” is correct. The rental home is real property used in a trade or business, so the exchange qualifies for like-kind exchange nonrecognition treatment. Any gain is recognized to the extent of boot, or non-like-kind property, received. If there is both debt relief and debt assumed, the debt is netted together (“net the debt”). Net debt relief is boot received and net debt assumed is boot paid.
Fair market value of new property received
$ 65,000
+ Cash boot received
12,000
+ Net debt relief boot received:
($60,000 debt relief – $52,000 debt assumed)
8,000
Total amount realized
85,000
– Adjusted basis of property given up
(70,000)
Gain realized
$ 15,000
The gain recognized is the lesser of the gain realized of $15,000 or the boot received of $20,000 ($12,000 cash + $8,000 net debt relief), which is $15,000.
Choice “1” is incorrect. The gain realized of $15,000 is recognized to the extent of total boot received, cash and net debt relief, not just the cash boot received.
Choice “2” is incorrect. The gain recognized is the lesser of the gain realized of $15,000 or the total boot received of $20,000.
Choice “3” is incorrect. The gain realized of $15,000 is recognized to the extent of total boot received, cash and net debt relief, not just the net debt relief boot received.
MCQ-12538
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the
depreciation of this asset over seven years?
1. Section 179 provides a greater deduction over the life of the asset because, subject to limitations, the cost of the asset is deductible in full.
2. Depreciation provides a greater deduction over the life of the asset.
3. The cost of the asset may be deducted under both Section 179 and as depreciation.
4. There is no difference in the total amount that is deductible over the life of the asset.
Choice “4” is correct. The total amount that is deductible over time is the same for both cost recovery methods. The total cost of the asset is deducted in the first year under Section 179, subject to certain limitations. If the asset is depreciated, a portion of the total cost is deducted each year over the life of the asset, so that the total cost of the asset has been deducted by the end of the asset’s life.
Choice “1” is incorrect. Under Section 179 the cost of the asset is deductible in full, subject to certain limitations, but this is the same amount as the total deduction over the life of the asset if the asset is depreciated.
Choice “2” is incorrect. The total deduction over the life of the asset when depreciated is the same amount as the deduction under Section 179. The total cost recovery deduction under both methods is the cost of the asset.
Choice “3” is incorrect. The cost of the asset may be deducted under either Section 179 or as depreciation, but not both
MCQ-01719
Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common
stock for $15,000 on December 15, Year 1, and an additional 100 shares for $13,000 on
December 30, Year 1. On January 3, Year 2, Smith sold the shares purchased on
December 15, Year 1, for $13,000. What amount of loss from the sale of Core’s stock is
deductible on Smith’s Year 1 and Year 2 income tax returns?
Year 1 Year 2
1. $0 $2,000
2. $0 $0
3. $2,000 $0
4. $1,000 $1,000
Choice “2” is correct. In Year 1, no sale of stock occurred so there would be no loss. In Year 2, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000.
Choice “1” is incorrect. The $2,000 loss realized in Year 2 is disallowed under the wash sale rules.
Choice “3” is incorrect. In Year 1, there is no possible loss since no shares were sold.
Choice “4” is incorrect. In Year 1, there is no loss since no shares were sold. In Year 2, the $2,000 loss is disallowed under the wash sale rules.
MCQ-14662 On January 1, in connection with the purchase of all of the assets of Joe Swift's business, Fast, Inc. entered into a covenant not to compete with Joe for a period of five years, with an option by Joe to extend it to seven years. What is the amortization period of the covenant for tax purposes? 1. 7 years. 2. 5 years. 3. 15 years. 4. 17 years.
Choice “3” is correct. Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition.
Choice “1” is incorrect. The option to extend does not impact the amortization period.
Choice “2” is incorrect. The time certain does not impact the amortization period.
Choice “4” is incorrect. 17 years is longer than required to amortize intangible assets for federal income tax purposes.
MCQ-12114 As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf also has an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis safe harbor rule, how much can Wolf deduct for tax purposes in Year 3? 1. $0 2. $7,500 3. $4,000 4. $12,000
Choice “4” is correct. The de minimis safe harbor rule will apply, because Wolf has a written policy to expense certain property as of the beginning of the year. Because it has an applicable financial statement (AFS), the de minimis rule allows the company to expense items costing up to $5,000 each. These three items cost $4,000 each, so all $12,000 ($4,000 × 3) can be expensed and deducted.
Choice “1” is incorrect. $0 would be correct if the de minimis rule did not apply or if the cost for each item exceeded $5,000.
Choice “2” is incorrect. Taxpayers without an applicable financial statement (AFS) can deduct items that cost up to $2,500. These items cost more than $2,500 each, so Wolf would have to capitalize the three assets if it did not have an AFS. Since Wolf has an AFS and the items cost less than $5,000 each, it is allowed to deduct the cost of all three assets.
Choice “3” is incorrect. $4,000 is the deductible cost per item. But there are three items purchased.
MCQ-08969 Johnson borrowed $45,000 secured by land with a basis of $20,000. Johnson could not pay the principal, so the bank foreclosed and sold the land for $35,000 as full settlement of the debt. What income should Johnson recognize? 1. $10,000 2. $15,000 3. $25,000 4. $35,000
Choice “3” is correct. 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. Gain recognized = $45,000 outstanding debt balance − $20,000 basis = $25,000.
Choice “1” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis.
Choice “2” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis. The amount realized is the $45,000 outstanding debt balance, not the $35,000 price for which the bank sold the land.
Choice “4” is incorrect. The gain recognized is $25,000, which is the $45,000 outstanding debt balance less the $20,000 basis.
MCQ-08886
An individual sold equipment used in a trade or business for $60,000. The equipment was acquired three years ago for $50,000, and $25,000 of allowable depreciation was claimed. How should the sale be reported on the income tax return?
1. Ordinary income of $35,000.
2. Ordinary income of $25,000 and Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) gain of $10,000.
3. Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) gain of $35,000.
4. Capital gain of $35,000.
Choice “2” is correct. Property used in a trade or business for more than one year is a Section 1231 asset. Equipment used in a trade or business for more than one year is a Section 1245 personal property asset, so any gain is Section 1245 ordinary income to the extent of prior depreciation taken on the asset. Adjusted basis = $50,000 cost − $25,000 accumulated depreciation = $25,000. Gain (loss) = $60,000 selling price − $25,000 adjusted basis = $35,000. The $35,000 gain is ordinary income to the extent of the $25,000 prior depreciation taken due to Section 1245 depreciation recapture. The remaining gain of $10,000 ($35,000 total gain − $25,000 ordinary income) is Section 1231 gain.
Choice “1” is incorrect. The entire $35,000 gain is not ordinary income. Only $25,000 is ordinary income due to Section 1245 depreciation recapture. The remaining gain in excess of the Section 1245 depreciation recapture is Section 1231 gain.
Choice “3” is incorrect. Only $10,000 of the gain is Section 1231 gain. The other $25,000 is ordinary income due to Section 1245 depreciation recapture.
Choice “4” is incorrect. The $35,000 gain is not capital gain. The gain is $25,000 ordinary income due to Section 1245 depreciation recapture and $10,000 Section 1231 gain.
MCQ-01667
Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the
current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market
value. Conner realized no other gain or loss during the year. On July 26 of the current year,
Alice sold the 300 shares of Zinco for $25,000.
What amount of the loss from the sale of Zinco stock can Conner deduct in the current
year?
$10,000
$0
$3,000
$5,000
Choice “2” is correct. Even though Conner has a realized loss of $10,000 on this transaction he cannot deduct the loss since it was incurred in a transaction with his daughter, a related party.
Choice “1” is incorrect. $10,000 is Conner’s realized loss on the sale. However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party.
Choice “3” is incorrect. $3,000 is the limit on deductible net capital losses. However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party.
Choice “4” is incorrect. Conner’s realized loss on the sale is $10,000 ($20,000 proceeds less $30,000 basis). However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party.
MCQ-04860
Chris and Jennifer purchased their home in California on January 15, Year 1, for $160,000. During their ownership they made no capital improvements. On August 1, Year 4, the couple moved to Virginia from California and rented out that home. On June 30, Year 6; the couple contracted to sell the California rental home for $437,500. For the calendar Year 6,
the couple will file a joint tax return. Disregarding any depreciation recapture rules, how should they treat the sale of the home for tax purposes?
1. Realized and recognized gain of $277,500, taxable on Schedule D.
2. Realized gain of $277,500; not taxable due to the home exclusion.
3. Realized and recognized gain of $277,500; taxable on Schedule E.
4. Realized gain of $437,500; not taxable due to the home exclusion.
Choice “2” is correct. Disregarding any depreciation recapture, Chris and Jennifer have a realized gain of $277,500. For tax purposes, this gain will not be recognized on their Year 6 tax return as it is excludable under the homeowner’s exclusion. To qualify for the full exclusion of $500,000 for a joint return, the taxpayers must own and use the home as the principal residence for two years out of the five-year period ending on the date of the sale or exchange.
Choices “1” and “3” are incorrect. In both these cases, the gain would not be recognized and taxed.
Choice “4” is incorrect. The realized gain is the difference between the taxpayer’s basis and the gross proceeds from the sale; not just the gross proceeds.
MCQ-06572 Parrot received land as a gift with a fair market value of $5,000. The land was purchased by the donor for $8,000. The land is sold for $6,000. What amount of gain should be reported? 1. $3,000 2. $2,000 3. $1,000 4. $0
Choice “4” is correct. In general, property acquired as a gift retains the cost basis it had in the hands of the donor. However, if the fair market value of the property at the time of the gift is lower than the cost basis in the hands of the donor (as in this case), the basis to the donee depends on the donee’s future selling price of the property, as follows:
If the future selling price is higher than the donor’s cost basis, the donee’s basis is the donor’s cost basis.
If the future selling price is lower than the fair market value of the property at the time of the gift, the donee’s basis is the fair market value of the property at the time of the gift.
If the future selling price is lower than the donor’s cost basis but higher than the fair market value of the property at the time of gift, neither gain nor loss is recognized by the donee on the sale of the property.
In this problem, the donee’s selling price of $6,000 is less than the donor’s cost basis of $8,000 but more than the fair market value of the property at the time of the gift of $5,000, so the donee does not recognize a gain or a loss on the sale of the property.
Choice “1” is incorrect. In order for the recognized gain to be $3,000, the donee’s basis in the property would have to be $3,000, and there is nothing in the problem to indicate that the donee’s basis would be $3,000.
Choice “2” is incorrect. In order for the recognized gain to be $4,000, the donee’s basis in the property would have to be $2,000, and there is nothing in the problem to indicate that the donee’s basis would be $2,000.
Choice “3” is incorrect. In order for the recognized gain to be $1,000, the donee’s basis in the property would have to be $5,000, which is the fair market value of the property at the time of the gift. However, the basis of gifted property in the hands of the donee is generally the donor’s cost basis. The basis of gifted property in the hands of the donee can only be the fair market value of the property at the time of the gift if that fair market value is lower than the donor’s cost basis and the donee’s future selling price of the property is lower than the fair market value of the property at the time of the gift. In this problem, the donee’s future selling price was not lower than the fair market value of the property at the time of the gift, so the donee’s basis would not be the property’s fair market value at the time of the gift.
MCQ-08972
O’Brien purchased two automobiles for personal use. Automobile 1 had an adjusted basis of $20,000, and automobile 2 had an adjusted basis of $10,000. O’Brien sold automobile 1 for $15,000 and automobile 2 for $15,000. What gain or loss should O’Brien recognize on
the sales of the automobiles?
1. Automobile 1, loss of $5,000; automobile 2, gain of $0
2. Automobile 1, loss of $0; automobile 2, gain of $0
3. Automobile 1, loss of $5,000; automobile 2, gain of $5,000
4. Automobile 1, loss of $0; automobile 2, gain of $5,000
Choice “4” is correct. A personal-use asset is a capital asset. A gain on the sale of a personal-use asset is a taxable capital gain. A loss on the sale of a personal-use asset is a nondeductible personal loss. Automobile 1: $15,000 sales price − $20,000 adjusted basis = $(5,000) nondeductible loss. Automobile 2: $15,000 sales price − $10,000 adjusted basis = $5,000 taxable capital gain.
Choice “1” is incorrect. The $5,000 loss on automobile 1 is a nondeductible personal loss. There is a $5,000 taxable gain on automobile 2.
Choice “2” is incorrect. There is a $5,000 taxable capital gain on automobile 2.
Choice “3” is incorrect. The $5,000 loss on automobile 1 is a nondeductible personal loss.
