Transactions in Property Flashcards
Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1.
Boone gave 100 shares of the stock to another of Carter’s relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share.
What was Dixon’s basis in the 100 shares of stock when acquired on June 1?
- $5,000
- $5,100
- $10,000
- $15,000
$5,000
When the shares are bequeathed to Boone, his basis in the shares is the fair market value at the date of death, which is $100 per share. When the stock splits 2 for 1, Boone then owns 200 shares of stock with a basis of $50 each. When the shares are gifted to Dixon, she takes the basis in the stock that Boone had, or $50. Therefore, Boone’s total basis is $5,000 (100 shares x $50 per share).
In June 2015, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in 1985, was $4,000, and market value on the date of the gift was $3,000. Hall sold his stock in July 2015 for $3,500. The donor paid no gift tax.
What was Hall’s reportable gain or loss in 2015 on the sale of the 100 shares of stock gifted to her?
$0
A donee basis in property acquired by gift usually equals the donor’s basis in the property plus the gift tax paid. However, if the fair market value of the gifted property at the time of the gift is less than the donor’s basis in the property, the donee assumes the fair market value of the property at the time of the gift as its basis for computing losses. The donee still uses the donor’s basis in the property plus the gift tax paid in computing gains.
When Hall received the stock as a gift from her mother, the fair market value of the stock ($3,000) was less than her mother’s basis in the property ($4,000). Thus, Hall assumed the stock’s fair market value at the time of the gift of $3,000 as her basis in the stock for computing losses and her mother’s basis of $4,000 as her basis in the stock for computing gains. Hall sold the stock for $3,500. Using Hall’s basis in the stock for computing losses of $3,000 indicates that she realized a gain of $500. However, using Hall’s basis in the stock for computing gains of $4,000 indicates that she realized a loss of $500. Therefore, Hall would not recognize any gain or loss from the sale of the gifted stock.
Simmons gives her child a gift of publicly-traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?
- $4,000 loss.
- No gain or loss.
- $6,000 gain.
- $36,000 gain.
No gain or loss.
The recipient of a gift has a gain basis and a loss basis in the asset received. The gain basis is the donor’s adjusted basis ($40,000) and the loss basis is the lower of the fair market value or the adjusted basis ($30,000). If the asset is later sold for an amount in-between the gain and loss basis ($36,000 is in-between $40,000 and $30,000), no gain or loss is recognized.
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?
- $0
- $ 40,000
- $ 60,000
- $100,000
$ 60,000
The gain recognized from the sale is:
- Amount realized $200,000
- Adjusted basis ($160,000 - $60,000) 100,000
- Recognized gain $100,000
Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.
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?
$290,000 Section 1231 loss. All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000.
On January 2, 2010, Bates Corp. purchases and places into service seven-year MACRS tangible property costing $100,000. On December 31, 2015, Bates sells the property for $102,000, after having taken $47,525 in MACRS depreciation deductions.
What amount of the gain should Bates recapture as ordinary income?
- $0
- $2,000
- $47,525
- $49,525
$47,525
The property sold by Bates Corp. is Section 1245 property and, as such, is subject to 1245 recapture. Section 1245 property includes all depreciable personal property (for example, equipment and machinery). Under Section 1245 recapture, gains are treated as ordinary income to the extent of depreciation or amortization taken on the property. The basis of Bates Corp.’s property at the time of the sale is $52,475 - $100,000 purchase price, less $47,525 in depreciation. Hence, the corporation had a gain of $49,525. However, owing to Section 1245 recapture, the amount of depreciation allowed, $47,525, will be considered ordinary income and only $2,000 will be considered a gain.
Jared purchases an apartment building on January 1, 2005 for $500,000. The building is depreciated using Modified Accelerated Cost-Recovery System (MACRS) straight-line depreciation. The apartment building is sold on December 31, 2015 for $620,000, when its adjusted tax basis is $320,000 (assume that $180,000 of depreciation has been claimed). How much gain from the sale of the building is subject to the 25% rate?
- $0
- $180,000
- $300,000
- $320,000
$180,000
Total gain on the sale is $300,000 ($620,000 - $320,000). Gain on the sale of realty is taxed at a 25% rate to the extent of the straight-line depreciation claimed on the asset. (Note that there is no Section 1250 recapture since straight-line depreciation was used for the asset.) The straight-line depreciation was $180,000 so the first $180,000 of gain is taxed at 25%. The remaining gain of $120,000 is taxed as Section 1231 gain.
The results of UNA Corporation’s first six years of operations are presented below.
YearResults of Operations.
- Section 1231 losses of $50,000.
- Section 1231 losses of $30,000.
- Section 1231 gains of $75,000
- Section 1231 losses of $20,000
- Section 1231 losses of $30,000
- Section 1231 gain of $80,000
UNA corporation’s year-six Section 1231 gain can best be characterized as?
- $80,000 Section 1231 gain.
- $50,000 ordinary income; $30,000 Section 1231 gain.
- $80,000 ordinary income.
- $55,000 ordinary income; $25,000 Sec. 1231 gain.
$55,000 ordinary income; $25,000 Sec. 1231 gain.
The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income. The $75,000 gain in Year 3 was recaptured as ordinary income by $50,000 of the Year 1 loss and $25,000 of the Year 2 loss. Note that $5,000 of the Year 2 loss remains unrecaptured. The $80,000 gain is recaptured as ordinary income to the extent of the $5,000 remaining Year 2 loss, $20,000 Year 4 loss, and $30,000 Year 5 loss for a total of $55,000. The remaining $25,000 gain is treated as a Sec. 1231 gain.
On August 22, 2015 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2015 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale?
- $300 short-term capital gain.
- $300 long-term capital gain.
- $300 ordinary income.
- $300 Section 1231 gain
$300 ordinary income.
Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.
Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
- Personal use 25%
- Investment use 30%
- Business use 45%
Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?
- Straight-line, 45%.
- Accelerated, 45%.
- Straight-line, 75%.
- Accelerated, 75%
Straight-line, 75%.
A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.
Under modified accelerated cost recovery system (MACRS) depreciation for property placed in service after 1986,
- Used tangible depreciable property is excluded from the computation.
- Salvage value is ignored for the purposes of computing the MACRS deduction.
- No type of straight-line depreciation is allowable.
- The recovery period for depreciable realty is 27.5 years.
Salvage value is ignored for the purposes of computing the MACRS deduction.
Under MACRS, the property’s depreciable basis as determined by Code Section 162 is used to compute the depreciation deductions, except that salvage values are considered to be zero. Hence, the salvage value is ignored for computing the MACRS depreciation deduction and, therefore, this response is correct.
A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $500,000, what maximum amount of cost recovery can the taxpayer claim this year?
- $650,000
- $500,000
- $450,000
- $200,000
$450,000
Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.
Browne, a self-employed taxpayer, has 2015 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2015, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2015 capital expenditure.
Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (assumed to be $25,000 ignoring bonus depreciation). Browne is not a member of any pass-through entity.
What is Browne’s deduction under the election?
- $4,000
- $10,000
- $15,000
- $20,000
$15,000
Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $25,000 for 2015. The Code-Section 179 deduction is limited to the amount of taxable income originating from the trade or business in which the property is used and is reduced dollar-for-dollar when the taxpayer places qualifying tangible personal property in service that exceeds $200,000. Since Browne purchases the equipment for use in business, the property qualifies as Code-Section 1245 property and, therefore, is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.
Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
- Goodwill $50,000
- Covenant not to compete $13,000
For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery periods?
- $63,000
- $50,000
- $13,000
- $0
$63,000
Goodwill is always amortizable. Covenants not to compete qualify if acquired in connection with the acquisition of a trade or business. Therefore, $63,000 can be amortized.
On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?
- 5 years.
- 7 years.
- 15 years.
- 17 years.
15 years.
The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.
On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham’s MACRS deduction for the office building in 2015?
- $9,600
- $6,000
- $3,600
- $2,250
$2,250
Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. This convention requires that, regardless of when realty is placed into service, it is considered to be placed into service at mid-month.
Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.
ACE Landscaping purchased equipment for $3,000 in the current year that it plans to use 100% for business purposes. The equipment qualifies as 5-year property. The deprecation percentages provided in the MACRS tables are as follows:
- Year 120.00%
- Year 232.00%
- Year 319.20%
- Year 411.52%
- Year 511.52%
- Year 65.76%
On August 20 of Year 3 ACE sells the equipment for $1,800. The depreciation allowed for the equipment for Year 3 is (rounded to the nearest dollar):
- $ 0
- $173
- $288
- $575
$288
The MACRS rules for personalty use the half-year convention which provides a deduction for one-half of the regular deprecation for the asset in the year it is sold. This, the depreciation for Year 3 is $3,000 x 19.2% x ½, or $288.
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?
- Partnership interest for partnership interest.
- Common stock for common stock.
- Apartment building for unimproved land.
- Manufacturing equipment for factory building.
Apartment building for unimproved land.
All realty is like kind for purposes of the like-kind exchange rules. Realty is land and buildings, so the unimproved land and apartment building are like-kind.
Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the machine. What taxable gain should Hogan recognize?
- $0
- $3,000
- $10,000
- $11,000
$3,000
This is a qualified like-kind exchange because a machine was exchanged for equipment and Hogan’s use for each is for business purposes.
Amount Realized:
- Equipment received $80,000
- Cash $1,000
- Debt relief $2,000
- Total $83,000
- Adjusted Basis:
- Cost $100,000
- Depreciation ($30,000)
- Total ($70,000)
- Realized Gain $13,000
Debt relief and the cash received are both considered to be boot received, which is a total of $3,000. The recognized gain is the lower of the realized gain, $13,000, or boot received, $3,000.
Mr. N’s business building is destroyed by a hurricane. The building had an adjusted basis to Mr. N of $200,000 and a fair market value immediately before the hurricane of $300,000. Mr. N receives a reimbursement of $270,000 from his insurance company and immediately spends $268,000 on a new business building. What amount must Mr. N include in his gross income?
- $(32,000) loss.
- $(30,000) loss.
- $2,000 gain.
- $70,000 gain.
$2,000 gain.
- Amount realized from conversion.$270,000
- Adjusted basis of old property.$200,000
- Realized gain/loss.$70,000
========================
- Amount realized from conversion$270,000
- Cost of replacement property.$268,000
- Recognized gain, limited to realized gain. $2,000
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In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of
- Convertible debentures.
- Convertible preferred stock.
- Partnership interests.
- Rental real estate located in different states.
Rental real estate located in different states.
Exchanges involving property held primarily for sale; stocks, bonds, notes and other securities; partnership interests; certificates trusts or beneficial interest; and evidences of indebtedness are not considered “like-kind” exchanges and, as a result, do not qualify for the non-recognition of gains or losses.
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?
- $0
- $ 50,000
- $100,000
- $150,000
$ 50,000
This transaction qualifies as a like-kind exchange because farmland (realty) was exchanged for an office building (realty). The realized gain on the property transaction is computed as follows:
A heavy equipment dealer would like to trade some business assets in a non-taxable exchange. Which of the following exchanges would qualify as non-taxable?
- The company jet for a large truck to be used in the corporation.
- Investment securities for antiques to be held as investments.
- A road grader held in inventory for another road grader.
- A corporate office building for a vacant lot.
A corporate office building for a vacant lot.
Remember, an exchange will be non-taxable if it qualifies under the like-kind exchange rules. Inventory items do not qualify under the like-kind exchange rules, so even though this is a grader for a grader, it will be a taxable exchange.
Aviary Corp., a sole proprietorship, sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?
- $180,000
- $120,000
- $54,000
- $36,000
$36,000
Aviary’s basis in the building is $420,000 ($500,000 cost - $80,000 depreciation). Aviary’s gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis). On the installment basis, the $180,000 gain is reported pro-rata as payments are received. In the year of sale, 20% ($120,000/$600,000) of the total payments of $600,000 are received. Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).
Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand’s recognized gain or loss?
- $0
- $500 loss.
- $1,000 loss.
- $2,000 loss
$1,000 loss.
Sand’s basis per share is $180 ($18,000/100 shares). Sand’s realized loss on the 50 shares sold is $2,000 ($7,000 amount realized - $9,000 basis ($180 x 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.
In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer’s adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?
- $115,000
- $125,000
- $165,000
- $175,000
$165,000
The gross profit on the sale is the amount realized less the property’s adjusted basis. The amount realized is $200,000 + $50,000 debt relief - $10,000 selling expenses, or $240,000. The $240,000 is reduced by the basis of $75,000 to produce the gross profit of $165,000.
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?
- $0
- $ 60,000
- $274,000
- $310,000
$0
The realized gain is computed as follows:
- Amount Realized:
- Cash $650,000
- Commission ($36,000)
- $614,000
- Adjusted Basis:
- Cost $300,000
- Improvements $40,000
- ($340,000)
Realized gain $274,000
Since this is a married couple that meets the ownership and use test they can exclude up to $500,000 of gain on the sale of a principal residence. Thus, none of the $274,000 gain is included in income.
Wynn, a single individual age 60, sold Wynn’s personal residence for $450,000. Wynn had owned Wynn’s residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is Wynn’s recognized gain from the sale of Wynn’s personal residence?
- $0
- $50,000
- $75,000
- $200,000
$0
A taxpayer may exclude realized gains up to $250,000 ($500,000 if filing joint) on the sale of a residence if the residence has been owned and used by the taxpayer as a principal residence for at least two of the preceding five years. (Note that for the $500,000 exclusion both spouses must meet the use test, but only one must meet the ownership test). Wynn’s realized gain is $200,000 ($450,000 amount realized - $250,000 adjusted basis), so all of this gain can be excluded.
Conner purchases 300 shares of Zinco stock for $30,000 in 2001.
On May 23, 2014, Conner sells all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realizes no other gain or loss during 2014. On July 26, 2015, Alice sells the 300 shares of Zinco for $25,000.
What is Alice’s recognized gain or loss on her sale?
- $0
- $5,000 long-term gain.
- $5,000 short-term loss.
- $5,000 long-term loss.
$0
A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property only to the extent that the gain exceeds the amount of the disallowed loss. Alice acquired the Zinco stock from her father, who sustained a disallowed loss of $10,000 ($20,000 selling price, less $30,000 purchase price). Hence, Alice would have to realize a gain of more than $10,000 for her to recognize a gain, since she now has a right of offset of $10,000.
Alice purchased the stock from her father for $20,000 and sold the stock for $25,000 - realizing a gain of $5,000. Since Alice’s realized gain is less than her father’s right of offset, Alice does not recognize any gain on the sale of the stock.