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Exam 14: Property Transactions: Capital Gains and Losses, 1231, and Recapture Provisions

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Question 61

Multiple Choice

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The following assets in Jack's business were sold in 2014: $\begin{array}{lll}\text { Asset } & \text { Holding Period }&\text { Gain/(Loss) }\\\text { Office Equipment } & 6 \text { years } & \$ 1,100 \\\text { Automobile } & 8 \text { months } & (\$ 800) \\\text { ABC Stock (capital asset) } & 2 \text { years } & \$ 1,400\end{array}$ The office equipment had a zero adjusted basis and was purchased for $8,000. The automobile was purchased for $2,000 and sold for $1,200. The ABC stock was purchased for $1,800 and sold for $3,200. In 2014 (the year of sale) , Jack should report what amount of net capital gain and net ordinary income?

A) $1,700 LTCG.
B) $600 LTCG and $300 ordinary gain.
C) $1,400 LTCG and $300 ordinary gain
D) $2,500 LTCG and $800 ordinary loss.
E) None of the above.

F) A) and E)
G) B) and E)

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Question 62

True/False

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Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

A) True
B) False

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Question 63

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The holding period of property given up in a like-kind exchange includes the holding period of the asset received if the property that has been exchanged is a capital asset.

Judith (now 37 years old) owns a collection of porcelain dolls that she acquired when she was a grade schooler. She had forgotten about them until her mother sent them to her. Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it. Judith had originally acquired all the dolls as gifts from her parents, so she has no way to establish a basis for the dolls. Using information from the Internet, she prepares a careful inventory of the dolls that includes their name, when they were first available for sale, their current value, and other pertinent information. She then lists them for sale on the Internet. To her surprise, she quickly gets an offer of $5,000 for all of them and sells them. Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket. What issues do these facts create?

When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain, which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?

An individual taxpayer has the gains and losses shown below. There are $3,000 of § 1231 lookback losses. What is the net long-term capital gain? $\begin{array}{llr} \text { Holding Period/Property}&\text { Character of Gain or Loss}&\text { Amount}\\5 \text { years/vacant land } & \S 1231 \text { gain } & \$ 7,000 \\2 \text { years/business equipment } & \S 1245 \text { gain } & 3,200 \\3 \text { years/publicly traded stock } & \text { Long-term capital gain } & 890 \\8 \text { months/publicly traded stock } & \text { Short-term capital loss } & (1,870)\end{array}$

Seamus had $16,000 of net short-term capital loss in 2013. In 2014, Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain. Which of the following statements is correct?

A franchisor licenses its mode of business operation to a franchisee.

Which of the following comparisons is correct?

Copper Corporation sold machinery for $47,000 on December 31, 2014. The machinery had been purchased on January 2, 2011, for $60,000 and had an adjusted basis of $41,000 at the date of the sale. For 2014, what should Copper Corporation report?

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:

Harold is a head of household, has $27,000 of taxable income in 2014 from non-capital gain or loss sources, and has the following capital gains and losses: $\begin{array}{llr} \text { 28 \% long-term capital gain } &\$4,300\\ \text {\( 28 \% \) long-term capital loss } &(2,000)\\ \text {\( 0 \% / 15 \% / 20 \% \) long-term capital gain } &19,000\\ \text { Short-term capital loss } &(1,700)\\\end{array}$ What is Harold's taxable income and the tax on that taxable income?

If the holder of an option fails to exercise the option, the lapse of the option is considered a sale or exchange on the option expiration date.

A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of AGI.

In the "General Procedure for § 1231 Computation: Step 2. § 1231 Netting," if the gains exceed the losses, the net gain is offset by the "lookback" nonrecaptured § 1231 losses.

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Vanna owned an office building that had been held more than one year when it was sold for $567,000. The real estate had an adjusted basis of $45,000 for the land and $233,000 for the building. Straight-line depreciation of $162,000 had been taken on the building. What is the amount and initial character of the gain or loss from disposition of the real estate? Is any of the gain unrecaptured § 1250 (25%) gain?

The chart below describes the § 1231 assets sold by the Ecru Company (a sole proprietorship) this year. Compute the gain or loss from each asset disposition and determine the net § 1231 gain treated as long­term capital gain for the year. Assume there is a § 1231 lookback loss of $4,000. $\begin{array} { l c c r r r } \text { Asset } & \text { Acquired } & \text { Sold } & \text { Cost } & \text { Deprecintion } & \text { Sale } \\& & & & & \text { Price } \\\text { Stamping machine } & 3 / 10 / 10 & 8 / 10 / 2014 & \$ 40,000 & \$ 29,736 & \$ 32,000 \\\text { Factory building } & 2 / 12 / 07 & 7 / 23 / 2014 & 80,000 & 18,038 & 90,000 \\\text { Tractor } & 5 / 16 / 09 & 11 / 13 / 2014 & 52,000 & 52,000 & 30,000 \\\text { Overhead crane } & 1 / 1 / 2 / 03 & 2 / 25 / 2014 & 74,000 & 74,000 & 18,000\end{array}$

Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.