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Exam 11: Property Dispositions

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Question 41

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Which of the following realized gains results in a recognized gain?

A) Farm machinery traded for farm machinery.
B) Sale to a related party.
C) Involuntary conversion.
D) Iowa cropland exchanged for a Minnesota warehouse.

E) All of the above
F) A) and D)

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Question 42

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Which of the following sections does not recapture or recharacterize a taxpayer's gain?

A) §1239.
B) §1250.
C) §1245.
D) §291.
E) None of these.

F) A) and C)
G) A) and E)

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Question 43

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Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

Suzanne, an individual, began business four years ago and has never sold a §1231 asset. Suzanne owned each of the assets for several years. In the current year, Suzanne sold the following business assets: $\begin{array} { | l | r | r | r | } \hline \text { Asset } & \begin{array} { r } \text { Original } \\\text { Cost }\end{array} & \begin{array} { r } \text { Accumulated } \\\text { Depreciation }\end{array} & \text { GainLoss } \\\hline \text { Machinery } & \$ 12,000 & \$ 7,000 & \$ 6,000 \\\hline \text { Furniture } & 10,000 & 2,000 & ( 3,000 ) \\\hline \text { Building } & 90,000 & 20,000 & 15,000 \\\hline\end{array}$ Assuming Suzanne's marginal ordinary income tax rate is 35 percent, what is the character of the gains and losses and what affect do they have on Suzanne's tax liability?

Realized gains are recognized unless there is specific exception.

All tax gains and losses are ultimately characterized as either ordinary or capital.

Andrew, an individual, began business four years ago and has never sold a §1231 asset. Andrew owned each of the assets for several years. In the current year, Andrew sold the following business assets: $\begin{array} { | l | r | r | r | } \hline \text { Asset } & \begin{array} { r } \text { Original } \\\text { Cost }\end{array} & \begin{array} { r } \text { Accumulated } \\\text { Depreciation }\end{array} & \text { GainLoss } \\\hline \text { Machinery } & \$ 12,000 & \$ 7,000 & \$ 6,000 \\\hline \text { Furniture } & 10,000 & 2,000 & 3,000 \\\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \\\hline\end{array}$ Assuming Andrew's marginal ordinary income tax rate is 30 percent, what is the character of the gains and losses and what affect do they have on Andrew's tax liability?

For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized.

Tyson had a parcel of undeveloped investment land that he wanted to trade for a warehouse to be used in his business. He found a buyer willing to pay him $450,000 for the land. He transferred the land to a third party intermediary on April 1^st of the current year. On May 10^th, with the help of a commercial real estate agent, Tyson identified two suitable warehouses. On August 10^th he made an offer on the first building which was rejected. On August 13^th an offer was accepted on the second warehouse. On September 23^rd the third party intermediary transferred $500,000 ($450,000 from the original property plus $50,000 from Tyson) to the seller and conveyed title to the warehouse to Tyson. Explain whether the exchange of property qualifies as a like-kind exchange.

The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:

Brandon, an individual, began business four years ago and has never sold a §1231 asset. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: $\begin{array} { | l | r | r | r | } \hline \text { Asset } & \begin{array} { r } \text { Origina } \\\text { Cost }\end{array} & \begin{array} { r } \text { Accumulated } \\\text { Depreciation }\end{array} & \text { GainLoss } \\\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \\\hline \text { Computers } & 10,000 & 6,000 & ( 2,000 ) \\\hline \text { Building } & 90,000 & 20,000 & ( 2,000 ) \\\hline\end{array}$ Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital gain.

Which of the following gains does not result solely in an ordinary gain or loss?

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

Depreciation recapture changes both the amount and character of a gain.

Leesburg sold a machine for $2,200 on November 10^th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg's gain or loss realized on the machine?

Brandy sold a rental house that she owned for $150,000. Brandy bought the house four years ago for $140,000 and has claimed $25,000 of depreciation expense. What is the amount and character of Brandy's gain or loss? If this is the only asset Brandy sells during the year and her ordinary tax rate is 35 percent, how much tax would she owe on the sale of the rental house?

The §1231 look-back rule applies whether there is a net gain or loss.

A parcel of land is always a capital asset.

What is the primary purpose of a third-party intermediary in a deferred like-kind exchange?