Tax Lesson 1

Question 1

Most personal use assets are

Answer 1

Capital Assets

Question 2

Items that are not capital assets

Answer 2

ACID
Accounts & notes receivable
Copyright & created works if held by creator
Inventory
Depreciable property used in trade or business

Question 3

Example Exam Question:
Which of the following is a capital asset?

A. Copyright on textbook owned by author
B. Painting owned by art collector
C. Office furniture used in business
D. Not receivable

Answer 3

B

Question 4

Ordinary income assets

Answer 4

When sold result in ordinary income

Usually include inventory, accounts receivable, creation/copyright in hands of creator

Question 5

Section 1231 Assets

Answer 5

Used in trade or business
Depreciable property
Real property
Do not include inventory, property held primarily for sale in ordinary course of trade/business, copyrights/created works
Specifically includes timber, coal, iron ore, livestock, unharvested crops

Question 6

When property is acquired in taxable exchange, cost is:
When property is acquired subject to mortgage, basis is:
When property is acquired as a dividend in kind or compensation for services, basis is:

Answer 6

FMV
FMV
FMV at time of acquisition

Question 7

Example Exam Question:
Buys machine at $58,000. Pays freight of $6,000. Paid additional 5% purchase price in sales tax. Hired local company to install & paid $10,00. What is basis?

A. $64,000
B. $66,900
C. $74,000
D. $76,900

Answer 7

D

Question 8

Increases to Basis

Answer 8

Capital improvements
Assessments for local improvements
Restoring damaged property after casualty loss
Legal fees
Zoning costs

Question 9

Decreases to Basis

Answer 9

Exclusion from income of subsidies for energy conservation measures
Casualty/theft loss deductions & insurance reimbursements (business only)
Deduction for clean fuel vehicles
Section 179 deduction
Credit for qualified electric vehicles
Depreciation
Non taxable corporate distributions

Question 10

Adjusted Taxable Basis - property acquired by non taxable exchange

Answer 10

Carryover basis if exchanged for equal value
Carryover + boot if exchanged for more valuable asset
Carryover - boot if exchanged for less valuable asset

Question 11

Special Basis Rules

Answer 11

Basis for inherited property is a step to FMV (up or down)

Holding period is always long term

Question 12

Example Exam Question:
Susie died & left niece 1000 shares of stock. Acquired December 12, 2021 for $25/share. Died February 14, 2022. Niece sold stock for $28/share on February 28, 2022. What is nature of her gain?

A. Short term capital gain
B. Long term capital gain
C. Part short term part long term capital gain
D. Ordinary income

Answer 12

B

Question 13

Gifted property general rule

Answer 13

Carryover basis

Question 14

Gifted property exception 1

Answer 14

When FMV less than donor’s basis
Double basis rule
For gains: carryover basis
For losses: FMV on date of gift
In between: doesn’t matter, no gain/loss

Question 15

Gifted property exception 2

Answer 15

Gift tax paid

Question 16

Basis when gift tax paid formula

Answer 16

Basis = donor’s basis + [(appreciation/value of taxable gift)x gift tax paid]

Question 17

Loss on gifted property

Answer 17

Basis is lower of donor’s basis or FMV at time of gift

Question 18

Holding period for gifted property

Answer 18

General rule: holding period includes donor’s time

If double basis asset sold for loss, holding period only donee’s time

Question 19

Example Exam Question:
Mike gifted 100 shares stock to James. Mike had basis of $40/share. FMV at gift $65/share. What is James’ basis?

A. $25/share
B. $40/share
C. $65/share
D. $105/share

Answer 19

B

Question 20

Example Exam Question:
Mike gifted 100 shares stock to James. Mike had basis of $40/share and held for more than 2 years prior to gift. FMV at gift $65/share. If James sells for $90/share 10 months after date of gift, what will gain or loss be?

A. $2500 LTCG
B. $2500 STCG
C. $5000 LTCG
D. $9000 STCG

Answer 20

C

Question 21

Example Exam Question:
Allison gifted 100 shares stock to Joe. Allison’s basis $55/share & held more than 2 years. At gift: FMV $40. What are tax consequences to Joe if he sells 2 years after date of gift for $48/share?

A. $700 loss
B. $800 gain
C. $1500 gain
D. No gain/loss

Answer 21

D

Question 22

Example Exam Question:
Donna gifted 100 shares stock to Colin. Donna had basis of $40/share & held for more than 2 years. At gift $65/share. Donna paid $2600 gift tax. Annual exclusion did not apply. What is Colin’s basis in stock?

A. $25/share
B. $40/share
C. $50/share
D. $65/share

Answer 22

C

Question 23

Example Exam Question:
Sold land owned for $150,000. Received 5 years ago as wedding gift. Originally purchased many years ago for $20000. At gift worth $100000. Gift tax paid $47000 (annual exclusion did not apply). What is LTCG on sale?

A. $42400
B. $50000
C. $92400
D. $130000

Answer 23

C

Question 24

Divorce basis

Answer 24

Carryover

Question 25

Example Exam Question: Carl & Caroline getting divorced. Carl agrees to pay $200/mo & transfer ownership of 2nd home (not personal residence) that has value or 300,000 mortgage of 140,000 & adjustable tax basis of 185,000. Owned 3 years. Within 3 months Carolyn sells home for 310,000. What are tax consequences? ``` A. 10,000 STCG & 115,000 LTCG B. 125000 LTCG C. 125000 STCG D. No recognized gain due to 250000 exemption E. 10000 STCG ```

Answer 25

B

Question 26

Related Party Transactions Rule

Answer 26

Only matters in loss Double basis: FMV for losses, transferor’s basis for gains Holding period always begins date of sale

Question 27

Example Exam Question: Mel purchased 100 shares for $5000 3 years ago. Last week sold to brother Isaiah for $4200. Isaiah sells shares today for $4300. Which best represents Isaiah’s sale? A. $100 LTCG B. 100 STCG C. 700 STCL D. No tax loss or gain

Answer 27

D

Question 28

Example Exam Question: Joe incurred extensive medical bills. Sibling Joseph purchased 300 shares stock 10 years ago for $8600. Worth $7500 currently. Joseph gifts to Joe for medical bills. Joe sells for $7400. Which best represents transaction for Joe? A. $100 LTCL B. $100 STCL C. $1200 STCL D. No tax loss or gain

Answer 28

B

Question 29

Bargain Sales to Charity

Answer 29

Basis= (amount realized/FMV) / original basis

Question 30

Taxpayers with AGI over 200k (single) or 250k (mfj) also subject to

Answer 30

3.8% Medicare contribution tax on investment income for AGI that exceeds threshold

Question 31

I’m calculating holding period, day of disposition in included

Answer 31

Day of acquisition is not included

Question 32

Gains only taxed when

Answer 32

Both realized & recognized

Question 33

Realized

Answer 33

Disposition of asset | Segregation of gain

Question 34

Recognition

Answer 34

When gain is taxed

Question 35

Amount realized - adjusted basis = __? | Cost of property + capital additions - cost recovery = __?

Answer 35

Realized gain/loss | Adjusted basis

Question 36

Ordinary gains are | Ordinary losses are

Answer 36

Fully taxable | Fully deductible

Question 37

Capital gains/losses

Answer 37

Subject to special tax treatment

Question 38

Party giving up or shedding debt

Answer 38

Seemed to have additional amount realized

Question 39

Party taking in debt

Answer 39

Depends to be paying that amount in the exchange

Question 40

Sale of mortgaged real estate can yield

Answer 40

Phantom income

Question 41

Losses generated on personal property exchanges/sales

Answer 41

Not permitted for tax deduction

Question 42

Index fund for index fund | Index fund for managed large cap fund

Answer 42

Yes wash sale | Not not wash sale

Question 43

Wash sale rules apply to sales/trades of contracts & options

Answer 43

Do not apply to sales/trades of commodity futures & foreign currencies

Question 44

To use gain exclusion on home

Answer 44

Both must meet use requirement (2/5 years) - 1 yr stay in nursing home doesn’t count One must meet ownership requirement of 5 years

Question 45

Reduced exclusion if you don’t meet use/owning requirements if

Answer 45

Change in employment Change in health Other unforeseen circumstances

Question 46

Example Exam Question: MFJ. Purchased home 18 months ago for $685000. Sold today for 925000 & want to know tax consequences. Required to move because of employment. How much gain must be recognized this year? A. $0 B. $240000 C. $375000 D. $925000

Answer 46

A

Question 47

Example Exam Question: Bought beach front to rent out for next year until retire & move there permanently. Purchase price $300000. Rents totaled $45000. Promptly moved to home & lived 4 years before downsizing to be closer to family. If sales price is $500000, how much gain is taxable? A. $0 B. $20000 C. $40000 D. $200000

Answer 47

C

Question 48

Loss resulting from worthless securities

Answer 48

Deductible in year securities became completely worthless

Question 49

When netting short & long term, if excess losses result

Answer 49

Shifted to category carrying highest tax rate

Question 50

Net capital losses deductible for AGI up to

Answer 50

3000/year Excess carried over Retain classification of short or long term

Question 51

Example Exam Question: Gain on sale 12,000 purchase held 18 months Gain on sale 6,200 inheritance held 6 months Gain on sale 7,500 gift, donor held 2 year Loss on sale 14,000, purchase held 3 months Loss on sale 3,000, purchase held 2 years ``` What is net capital gain or loss? A. LTCG 22700 B. LTCG 8700 C. STCL 14000 D. LTCL 3000, carryover STCL 11000 ```

Answer 51

B

Question 52

Example Exam Question: What is net LTCG & LTCL from previous question? A. LTCL $21400 B. LTCG $16500 C. LTCL $9000 D. LTCG $22700

Answer 52

D

Question 53

Example Exam Question: What is net STCG & STCL from previous question? A. STCL $300 B. STCL $6500 C. STCL $7800 D. STCL $14000

Answer 53

D

Question 54

Capital gain recognized to full extent each year regardless of size

Answer 54

Capital loss only recognized up to what offsets gains with additional $3000/year with indefinite carryover

Question 55

Single taxpayer can deduct $50k of loss on small business stock as ordinary loss in any given year if following requirements are met:

Answer 55

Domestic corp Small business corp when stock issued Incorporated after nov 6 1978 Loss sustained by original owner of stock who is not corporation, trust, or estate Issued to original owner for money or property For 5 years prior to loss, corp must have earned more than 50% gross receipts from actual income sources

Question 56

Related Parties include

Answer 56

``` Siblings (half but not step) Children Grandchildren Parents Grandparents Spouse ```

Question 57

Related Parties Do Not Include

Answer 57

In laws Aunts/Uncles Cousins

Question 58

Example Exam Question: Bill owns 1000 shares stock. Bought in 1988 for 40000. Current FMV 32000. Sells to brother Jack for 32000. Brother sells to friend for 38500 six months later. What are tax consequences to Bill & Jack? A. 8000 LTCL to bill, 6500 LTCG to Jack B. 8000 LTCL to bill, 6500 stcg to Jack C. No gain/loss to bill, no gain/loss to Jack D. No gain/loss to bill, 3500 LTCL to Jack

Answer 58

C

Question 59

To be classified as 1232 asset

Answer 59

Must have long term holding period (>1 year)

Question 60

Example Exam Question: Which is not section 1231 asset? A. Copyright owned by author B. Timber C. Coal D. Same sex livestock

Answer 60

A

Question 61

1231

Answer 61

Gains - capital gains Losses - ordinary income If in 15% or lower tax bracket for ordinary income, 0% capital gains rate will apply

Question 62

C Corps do not benefit for 1231

Answer 62

Taxes at same rate for both ordinary income & capital gains

Question 63

Section 1245 Property

Answer 63

Ordinary income for depreciation recapture then LTCG rates after Tangible property used in trade or business

Question 64

Section 1250

Answer 64

Excess depreciation taxed ordinary income Depreciation taxed 25% Remainder taxed LTCG rate Real property used in business

Question 65

The only way to have a section 1231 gain on section 1245 property is to

Answer 65

sell for more than originally purchased for

Question 66

Example Exam Question: Sells equipment used for business for $18000. Originally purchased for $15000 taken $7000 depreciation. What is section 1231 gain? A. $11000 B. $8000 C. $7000 D. $3000

Answer 66

D

Question 67

Example Exam Question: In previous question, how much gain is taxed as ordinary income? A. $0 B. $11000 C. $3000 D. $7000

Answer 67

D

Question 68

Any sale amount in excess of original purchase price of section 1245 asset is

Answer 68

1231 gain

Question 69

All section 1250 losses are

Answer 69

Ordinary losses

Question 70

5 Year Lookback Rule

Answer 70

Net section 1231 gain in current year will be taxed at ordinary income rates to extent of any 1231 losses in last 5 years

Question 71

Non taxable exchanges

Answer 71

Non recognition: Realized, like kind exchanges, principal residence, investment real estate, life insurance policies Non taxable transactions: Realized not currently recognized, postponed recognition, carryover basis, holding period carryover, depreciation recapture Tax free transaction: No recognition of gain is permanent

Question 72

Like Kind Exchanges (section 1231)

Answer 72

Deferred taxation of gains Only real property if held for productive use or as investment Not personal assets, stocks, other securities, tangible property Similar character/nature (broad)

Question 73

When like kind exchange treatment available

Answer 73

Mandatory

Question 74

To avoid taxation in 1031

Answer 74

Proceeds must be held in escrow Replacement property identified within 45 days of sale Closing must take place earlier of: 180 days from sale or due date of tax return for year original property was sold

Question 75

1031 basis & holding period

Answer 75

Carryover

Question 76

Non-like kind property & cash received

Answer 76

Boot (can reduce basis when paid in excess of gain)

Question 77

Mortgage transfer in 1031 is considered

Answer 77

Boot (If giving mortgage, receiving boot) (If undertaking mortgage, giving boot)

Question 78

Example Exam Question: Exchange like kind real estate assets: Jack: fmv 50k, adj tax basis 23k Jill: fmv 70 If Jack pays Jill cash of 20k + asset, how much does Jack recognize? A. $0 B. $20k C. $23k D. $27k

Answer 78

A

Question 79

Example Exam Question: From previous, what is Jack’s new basis? A. $20k B. $23k C. $27k D. $43k

Answer 79

D

Question 80

Example Exam Question: From previous, assume Jill’s adjusted basis in original asset was $45k. How much gain must Jill recognize? A. $5k B. $10k C. $15k D. $20k

Answer 80

D

Question 81

Example Exam Question: From previous, how much is Jill’s basis in new asset given old basis was $45k? A. $50k B. $25k C. $20k D. $45k

Answer 81

D

Question 82

Example Exam Question: From previous, assume Jill’s basis in old asset $55k. How much gain must Jill recognize on transaction? A. $5k B. $10k C. $15k D. $20k

Answer 82

C

Question 83

Example Exam Question: From previous, what is Jill’s basis in new asset of original basis $55k? A. $50k B. $45k C. $40k D. $35k

Answer 83

A

Question 84

Related Parties Like Kind Exchanges

Answer 84

If within 2 years, both must recognize gain/loss from time of exchange Includes siblings, spouse, ancestors, descendants In business, controlled corp & corps that are members of control group Does not apply if either party does before sale occurs or taxpayer can demonstrate to satisfaction of IRS avoidance of tax was not principal purpose of sequence of transactions

Question 85

Exchanges of stock for property:

Answer 85

No gain/loss recognized when corp receives money or property in return for stock 1032, sale of stock to investors treated as infusion of capital - no income tax

Question 86

Involuntary Conversions

Answer 86

Destruction, theft, seizure, condemnation, sale/exchange from threat of condemnation, eminent domain

Question 87

1033 permits nontaxable treatment of gains of amount reinvested in replacement equals/exceeds amount realized

Answer 87

Replacement property must be: Similar in function or use Acquired within 2 years (3 for condemnation) from year end of year gain realized

Question 88

Functional use for owner-user | Taxpayer use for owner-investor

Answer 88

Replacement property must serve same functional use | Must be used in similar activity as original property

Question 89

Example Exam Question: Office building destroyed by hurricane. Destroyed aug 29, yr 1. FMV $1m. Adjusted basis $450k. Insurance adjuster determines feb 14, yr 2 should be paid $1m, what is last date can reinvest under section 1033 to avoid recognition of gain? A. Aug 29, yr 3 B. Aug 29, yr 4 C. Dec 31, yr 3 D. Dec 31, yr 4

Answer 89

D

Question 90

Example Exam Question: From previous, how much cash must be invested to avoid recognition? A. $0 B. $450k C. $550k D. $1m

Answer 90

A

Question 91

Insurance - Section 1035

Answer 91

Ordinary life for life insurance on same individual or endowment or annuity Endowment May be exchanged for endowment with payments no later than original or annuity Annuity May be exchanged for annuity on same person (no for life insurance or endowment) Transferred basis rules apply, cash received will trigger gain Losses not deductible

Question 92

Example Exam Question: Which of the following are correct tax free exchanges? 1. Life insurance for life insurance 2. Life insurance for annuity 3. Annuity for annuity 4. Annuity for life insurance A. 1 only B. 1,2 C. 1,2,3 D. 1,2,3,4

Answer 92

C

Question 93

Transactions Divorce

Answer 93

Nontaxable | Carryover basis

Question 94

Lesson 1 Review: Stock transactions this year: Purchased last year Oct 31 for $12,000. March 5 of this year completely worthless. Purchased 1244 stock several years ago for $200,000. Sold for $100,000 this year. What is net long-term loss for current year? A. $12,000 B. $50,000 C. $62,000 D. $112,000

Answer 94

C

Question 95

Lesson 1 Review: Owned securities. Paid $5000 for shares & sold for $7000. Twenty days later purchased identical shares for $6500. Which is true? A. Wash sale rules will apply B. Stock will receive section 1244 treatment C. Stock will receive like kind treatment D. Basis in new shares is $6500

Answer 95

D

Question 96

Lesson 1 Review: Received gift of property from mom. Mom had basis of $50000. Worth $100000 at dare of transfer. Mom paid gift tax of $45000. Annual exclusion does not apply. What is daughter’s basis? A. $50000 B. $72500 C. $95000 D. $100000

Answer 96

B

Question 97

Lesson 1 Review: Made several exchanges during the year. Which qualifies for like-kind treatment? A. Personal auto for brother’s auto B. Cow used in farm business for steer C. Unimproved land held for investment for apartment building held for investment D. Inventory items that were brown for inventory items that were red

Answer 97

C

Question 98

Lesson 1 Review: Machine used in business. Downsizing & needs smaller machine. Local business owner offered to enter exchange. Morgan will receive Caleb’s machine worth $75000 & $25000 cash in exchange for her machine worth $100000. Morgan’s basis $80000. Caleb’s basis $25000. What is Morgan’s new basis? A. $25000 B. $75000 C. $80000 D. $100000

Answer 98

B

Question 99

Lesson 1 Review: Business property destroyed by fire. Original basis $250000. Insurance proceeds $600000. Acquired replacement property 2 months later & paid $620000 for new property. What is basis in new property? A. $250000 B. $270000 C. $600000 D. $620000

Answer 99

B

Question 100

Lesson 1 Review: S & K married last year. Lived in K’s home after getting married. Kevin has lived in & owned home for 5 years. S. Has lived there 9 months. Sold because K’s job transferred him to another state. Basis in home is $400000 FMV is $1000000. What is the gain that will be recognized on sale of home? A. $100000 B. $256250 C. $412,250 D. $600000

Answer 100

B

Question 101

``` Lesson 1 Review: Had following gains/losses for the year. LT loss: $45000 ST loss: $15000 LT gain: $20000 ST gain: $19000 ``` How much gain/loss will be deducted on tax return? A. $0 B. $3000 against ordinary income C. $21000 long term loss D. $4000 short term gain & $25000 long term loss

Answer 101

B

Question 102

Lesson 1 Review: Which is 1231 asset? A. Machine used in business purchased 6 months ago B. Land used in business purchased 10 years ago C. Inventory of a business D. Accounts receivables of a business

Answer 102

B

Question 103

Lesson 1 Review: Company purchased machine several years ago. Has taken depreciation deductions of $40000. Originally purchased for $90000. If sold today for $120000, how much ordinary income recognized? A. $0 B. $30000 C. $40000 D. $70000

Answer 103

C

Question 104

Lesson 1 Review: Company purchased business real estate many years ago used in business. Purchase price $1m. Has taken depreciation deductions of $800k, $500k straight line. If company sells property today for $2m, what are tax consequences? A. $1.8m taxed at 20% B. $300k ordinary income, $500k 25%, $1m 20% C. $1.5m taxed at 20% D. $500k at 25%, $1m at 20%

Answer 104

B

Question 105

Lesson 1 Review: Ben sold land to brother on January 1 current year. Ben had basis of $40k & sold for $240k. Sold land to bro using installment sale. Bro will pay $2000/mo for 10 years plus applicable rate of interest. 6 months after purchasing land, bro sold property for $300k. How much gain will bro recognize in current year if 12 payments were made? A. $4000 B. $20000 C. $200000 D. $260000

Answer 105

C

Question 106

Lesson 1 Review: Grandma gave stock at death 5 years ago to Ginger. Grandma paid $100. Valued at $5000 when died. Ginger gave to daughter 2 years ago. Worth $4000 at transfer. Daughter sold for $4500 today. What is gain/loss? A. $0 B. Loss of $500 C. Gain of $500 D. Gain or $4400

Answer 106

A