R4-1 Flashcards
Smith made a gift of property to Thompson. Smith’s basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson’s gain on the disposition?
a.
$0
b.
$1,100
c.
$1,300
d.
$2,500
Choice “c” is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor’s basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor’s basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:
Amount realized $ 2,500
Basis (1,200)
Gain recognized $ 1,300
Choice “a” is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor’s basis and the fair market value at the date of the gift.
Choice “b” is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property (in all years except 2010), not gifted property.
Choice “d” is incorrect. This choice assumes that Thompson’s basis is zero. His basis is $1,200 as indicated above.
Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker’s tax basis in the acquired van?
a.
$13,000
b.
$20,000
c.
$7,000
d.
$17,000
Choice “d” is correct. $17,000 is the tax basis in the van.
The basis for like-kind exchanges is computed as follows:
Basis of old property $ 20,000
Less: Boot received (3,000)
New basis $ 17,000
Alternate calculation: FMV of new van $10,000 + deferred loss $7,000 = New basis $17,000.
The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.
Choice “b” is incorrect. Basis must be reduced by non-like-kind assets (boot) received.
Choice “a” is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above.
Choice “c” is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.
Capital assets include:
a.
Seven-year MACRS property used in a corporation’s trade or business.
b.
A manufacturing company’s investment in U.S. Treasury bonds.
c.
A corporation’s accounts receivable from the sale of its inventory.
d.
A corporate real estate developer’s unimproved land that is to be subdivided to build homes, which will be sold to customers.
Choice “b” is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds.
Choice “c” is incorrect. Accounts receivable generated from the sale of inventory are excluded from the statutory definition of capital assets.
Choice “a” is incorrect. Depreciable property used in a trade or business is excluded from the statutory definition of capital assets.
Choice “d” is incorrect. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.
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?
a.
$10,000
b.
$5,000
c.
$3,000
d.
$0
Choice “d” 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 “c” 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 “b” 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.
Choice “a” 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.
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 was Alice’s recognized gain or loss on her sale?
a.
$5,000 long-term gain.
b.
$0
c.
$5,000 long-term loss.
d.
$5,000 short-term loss.
Choice “b” is correct. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market.
Choice “a” is incorrect. $5,000 is Alice’s realized long-term gain on the sale. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her.
Choice “d” is incorrect. Alice has a realized gain of $5,000 on the sale. However, since she is related to Conner, her holding period includes his holding period. Therefore, her realized gain is long-term. In addition, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her.
Choice “c” is incorrect. Alice can reduce the gain by the amount of loss her father could not deduct on the sale to her. However, she cannot reduce the gain below zero.
If the executor of a decedent’s estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent’s death?
a.
3
b.
12
c.
9
d.
6
Choice “d” is correct.
Rule: The executor can elect to use an alternate valuation date rather than the decedent’s date of death to value the property included in the gross estate. The alternate date is generally six months after the decedent’s death or the earlier date of sale or distribution.
Note: The valuation of the assets in an estate impacts the recipient as basis of the inherited assets.
Choices “b”, “c”, and “a” are incorrect, per the above rule.
In December, Year 10, Davis, a single taxpayer, purchased a new residence for $200,000. Davis lived in the new residence continuously from Year 10 until selling the new residence in July, Year 17 for $455,000. What amount of gain is recognized from the sale of the residence on Davis’ Year 17 tax return?
a.
$455,000
b.
$255,000
c.
$5,000
d.
$0
Choice “c” is correct. Provided Davis has lived in his home for a total of 2 years out of the 5 years preceding his sale of his residence, as a single taxpayer he may exclude up to $250,000 of gain on its sale. The basis on the residence sold in Year 17 is equal to its cost ($200,000).
Selling Price $ 455,000
Less: Basis (200,000)
Realized Gain 255,000
Less: Excluded Amount (250,000)
Recognized Gain $ 5,000
Choices “a”, “b”, and “d” are incorrect, per the above.
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
a.
$2,000
$0
b.
$0
$2,000
c.
$0
$0
d.
$1,000
$1,000
Choice “c” 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 “b” is incorrect. The $2,000 loss realized in Year 2 is disallowed under the wash sale rules.
Choice “d” 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.
Choice “a” is incorrect. In Year 1, there is no possible loss since no shares were sold.
In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for $16,000.
What amount of gain from the sale of the stock to the third party should Martin report on his Year 3 income tax return?
a.
$5,000
b.
$0
c.
$4,000
d.
$1,000
Choice “d” is correct. Losses between related parties are disallowed. Therefore, Fay’s $4,000 capital loss ($15,000 basis less $11,000 received) is disallowed because she sold the stock to her son, a related party. When her son sells the stock to an unrelated party, however, he can use the $4,000 disallowed loss to reduce any gain he realized from the sale (but not to create or increase a loss). His realized gain is $5,000 ($16,000 received less $11,000 basis), but he can reduce it by $4,000 to $1,000 using his mother’s disallowed loss. Employing the “Pass Key” in the text, Martin sold the stock for higher than Fay purchased it. The donor’s basis (i.e., $15,000) is, therefore, used to determine gain on the sale by Martin.
Choice “b” is incorrect. Martin’s gain, after reducing it by his mother’s disallowed loss, is reported on his tax return.
Choice “c” is incorrect. The $4,000 disallowed loss to his mother reduces his $5,000 gain.
Choice “a” is incorrect. The $5,000 gain is reduced by his mother’s $4,000 disallowed loss.
Hall, a divorced person and custodian of her 12-year-old child, filed her Year 9 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her Year 9 return:
In June, Year 9, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall’s reportable gain or loss in Year 9 on the sale of the 100 shares of stock gifted to her?
a.
$0
b.
$1,000 loss.
c.
$500 loss.
d.
$500 gain.
Choice “a” is correct.
Rule: The basis of property received as a gift in the hands of the donee depends on whether the selling price of the property is more or less than the basis for gain or loss.
If the property is sold at a gain, the basis to the donee is the same as it would be in the hands of the donor. If the property is sold at a loss, the basis to the donee is the same as it would be in the hands of the donor or the FV of the property at the date of the gift, whichever is lower. In some cases, such as this fact situation, there is neither gain nor loss on the sale of the gift, because the selling price is less than the basis for gain and more than the basis for loss.
Choices “d”, “c”, and “b” are incorrect, per the above rule.
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:
a.
Convertible preferred stock.
b.
Rental real estate located in different states.
c.
Partnership interests.
d.
Convertible debentures.
Choice “b” is correct. No taxable gain or loss will be recognized on a like-kind exchange if both assets are tangible property. Rental real estate located in different states qualifies for a like-kind exchange.
Choices “d”, “a”, and “c” are incorrect. In order to meet the “like-kind exchange” requirements for nonrecognition of gain or loss, the property exchanged must be tangible property. Convertible debentures, convertible preferred stock, and partnership interests are not considered tangible property.
Exception: If the same class of stock of the same corporation is exchanged, it will qualify for “substituted basis.”
In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estate plus cash of $50,000. The following additional information pertains to this transaction:
Property given up by Reed
Fair value $ 500,000
Adjusted basis 300,000
Property received by Reed
Fair value 450,000
What amount of gain should be recognized in Reed’s Year 9 income tax return?
a.
$0
b.
$200,000
c.
$50,000
d.
$100,000
Choice “c” is correct. $50,000 is Reed’s recognized gain in Year 9.
Rule: Gain is only recognized on an exchange of “like-kind” property for the lesser of the amount of “gain realized” or the amount of “boot” received in the exchange.
Fair value of property received $ 450,000
Amount of cash (“boot”) received 50,000
Total amount realized $ 500,000
Basis of property given up (300,000)
Gain realized $ 200,000
Gain recognized* $ 50,000
* Gain recognized is the lesser of the amount of “gain realized” or amount of the “boot” received.
Choices “b”, “d”, and “a” are incorrect, per the above rule.
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
a.
Capital
Capital
b.
Section 1231
Capital
c.
Capital
Section 1231
d.
Section 1231
Section 1231
Choice “d” is correct. Because the parking lot and the shed constitute real estate and depreciable assets used in a trade or business, respectively, 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 and 1245, respectively, upon sale of the assets.
Capital assets are defined as all property held by the taxpayer, except:
Property normally included in inventory or 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 “a”, “b”, and “c” are incorrect, per the above rule.
Lee qualified as head of a household for Year 9 tax purposes. Lee’s Year 9 taxable income was $100,000, exclusive of capital gains and losses. Lee had a net long-term loss of $8,000 in Year 9. What amount of this capital loss can Lee offset against Year 9 ordinary income?
a.
$0
b.
$8,000
c.
$4,000
d.
$3,000
Choice “d” is correct. The capital loss deduction is limited to $3,000 per year with the excess carried forward indefinitely. In this case, Lee can deduct $3,000 against his income and carry forward the remaining $5,000.
Choices “a”, “c”, and “b” are incorrect based on the above explanation.
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold?
a.
$6,500
b.
$6,200
c.
$6,000
d.
$5,000
Choice “d” is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original share over both the original shares and the new shares received resulting in the same total basis, but a lower basis per share of stock held. Therefore, Greller’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in 100 share is 100 x $50 = $5,000.
Choices “c”, “b”, and “a” are incorrect, per the above explanation.
Farr made a gift of stock to her child, Pat. At the date of gift, Farr’s stock basis was $10,000 and the stock’s fair market value was $15,000. No gift taxes were paid. What is Pat’s basis in the stock for computing gain?
a.
$0
b.
$15,000
c.
$10,000
d.
$5,000
Choice “c” is correct. Property acquired as a gift generally retains the rollover cost basis that it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat’s basis for computing a gain is the rollover cost (basis), $10,000.
Choices “a”, “d”, and “b” are incorrect, per the explanation above.
Allen owns 100 shares of Prime Corp., a publicly traded company, which Allen purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, Year 3, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for Year 3?
a.
$1,500
b.
$300
c.
$2,000
d.
$750
Choice “a” is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received, resulting in the same total basis but a lower basis per share of stock held. Therefore, Allen’s total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares). Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200). Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000. Calculate his gain as follows:
Amount realized ($65 x 100) $ 6,500
Adjusted basis (5,000 - calculated above) (5,000)
Realized & recognized gain $ 1,500
Choices “b”, “d”, and “c” are incorrect.
Wallace purchased 500 shares of Kingpin, Inc. 15 years ago for $25,000. Wallace has worked as an owner/employee and owned 40% of the company throughout this time. This year, Kingpin, which is not an S corporation, redeemed 100% of Wallace’s stock for $200,000. What is the treatment and amount of income or gain that Wallace should report?
a.
$200,000 long-term capital gain.
b.
$175,000 long-term capital gain.
c.
$175,000 ordinary income.
d.
$0
Choice “b” is correct. An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). Ownership percentage is not a factor in the calculation, and, in this question, nor is the fact that the corporation is not an S corporation. The calculation is simple: Wallace invested $25,000 in the stock and received $200,000 for 100% of his investment 15 years later. The capital gain is $175,000 ($200,000 - $25,000), and it is considered long-term because the stock was held for greater than one year.
Choice “d” is incorrect. There is $175,000 of gain on the transaction ($200,000 - $25,000). This type of transaction is not a transaction that is excluded from tax in the tax code.
Choice “c” is incorrect. An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). Although the calculation of the income is correct (i.e., $175,000), ordinary income is not the proper treatment for this transaction.
Choice “a” is incorrect. Although this transaction does result in a long-term capital gain, Wallace has basis in the stock ($25,000), and the gain is calculated as the proceeds from the sale ($200,000) less the basis in the stock.
Which of the following sales should be reported as a capital gain?
a.
Sale of equipment.
b.
Sale of inventory.
c.
Government bonds sold by an individual investor.
d.
Real property subdivided and sold by a dealer.
Choice “c” is correct. Government bonds held by an individual investor are considered capital assets in the hands of the investor. When these types of security investments are sold, the resulting gain or loss is reported as capital.
Choice “a” is incorrect. In this case, we must assume that the BEST answer is option “c” (as that option would ALWAYS result in capital gain or loss treatment) and that the examiners are assuming that the equipment is depreciable equipment that has been used in a business for over one year. [If the equipment had been considered a personal asset by the examiners and had sold for a gain, it would also be a capital asset that sold for a capital gain, and there would be two correct answers. Remember that the correct answer is the option that best answers the question.] Depreciable equipment used in a business and held for over one year falls under the category of Section 1245 property. When Section 1245 assets are sold at a gain, all the accumulated depreciation on the asset is recaptured as ordinary income (the same category as the depreciation expense was deducted against), and any remaining gain (typically, in practice, this is not the case, though, as the asset would have had to sell for an amount greater than its purchase price) is capital gain under Code Section 1231. [Note that Section 1245 applies only to gains. If the asset had sold for a loss, the loss would have been ordinary under Section 1231.]
Choice “d” is incorrect. Real property sold by a dealer is considered inventory and results in ordinary income or ordinary losses upon sale. Inventory is not a capital asset and is not afforded the capital gain benefits.
Choice “b” is incorrect. Inventory is not a capital asset and is not afforded the capital gain benefits. The sale of inventory results in ordinary income or loss (e.g., gross profit on sales) being reported on the tax return, as inventory is an asset held for sale in the ordinary course of business.
Starr, a self-employed individual, purchased a piece of equipment for use in Starr’s business. The costs associated with the acquisition of the equipment were:
Purchase price $ 55,000
Delivery charges 725
Installation fees 300
Sales tax 3,400
What is the depreciable basis of the equipment?
a.
$59,125
b.
$58,400
c.
$59,425
d.
$55,000
Choice “c” is correct. The rules for depreciable basis in tax are generally the same as the GAAP rules for capitalizing an asset. The depreciable basis is the cost associated with the purchase of the asset and with getting the asset ready for its intended use. Further improvements are also capitalized, and the basis is reduced for any accumulated depreciation. In this case, the cost of obtaining the equipment and getting the equipment ready for its intended use includes all the items shown above, as follows:
Purchase price $ 55,000
Delivery charges 725
Installation fees 300
Sales tax 3,400
Total depreciable basis $ 59,425
Choice “d” is incorrect. The costs of delivery charges, installation, and sales tax are all part of the cost of obtaining the asset and getting the asset ready for its intended use. All of these charges are included in the depreciable basis of the equipment.
Choice “b” is incorrect. The costs of delivery charges and installation are both part of the cost of obtaining the asset and getting the asset ready for its intended use. These charges are included in the depreciable basis of the equipment.
Choice “a” is incorrect. The cost of installation is part of the cost getting the asset ready for its intended use. This charge is included in the depreciable basis of the equipment.
Which of the following statements is the best definition of real property?
a.
Real property is land and everything permanently attached to it.
b.
Real property is only land.
c.
Real property is land and intangible property in realized form.
d.
Real property is all tangible property including land.
Choice “a” is correct. Real property includes land and all items permanently affixed to the land (e.g., buildings, paving, etc.)
Choice “b” is incorrect. Real property includes more than just the land (as per the explanation above); it includes all items permanently affixed to land.
Choice “d” is incorrect. “All” tangible property could include moveable personal property and is therefore, incorrect.
Choice “c” is incorrect. “Intangible property in realized form” is a distracter and a contradiction in terms.
Gibson purchased stock with a fair market value of $14,000 from Gibson’s adult child for $12,000. The child’s cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson’s recognized gain from the sale?
a.
$2,000
b.
$6,000
c.
$4,000
d.
$0
Choice “a” is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm’s length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative’s resale price is higher, lower, or between the first relative’s basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson’s adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson’s basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson’s adult child. Gibson’s basis in the stock is, therefore, his adult child’s basis of $16,000. Gibson’s recognized basis is calculated as follows:
Selling price $ 18,000
Basis (16,000)
Gain $ 2,000
Choice “d” is incorrect. There would be a zero gain or loss if the selling price were between the adult child’s basis and Gibson’s purchase price, but this is not the case in the facts.
Choice “c” is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP - $14,000 FMV = $4,000]
Choice “b” is incorrect. This would be the answer if the basis were Gibson’s purchase price of $12,000; however, because the stock sold for more than Gibson’s child’s basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child’s original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]
An individual had the following capital gains and losses for the year:
Short-term capital loss $ 70,000
Long-term gain (unrecaptured Section 1250 at 25%) 56,000
Collectibles gain (28% rate) 10,000
Long-term gain (15% rate) 20,000
What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?
a.
Short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the 15% rate.
b.
Long-term gain of $16,000 at the 15% rate.
c.
Long-term capital gain of $3,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.
d.
Short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.
Choice “b” is correct. Specific netting procedures for capital gains and losses are outlined in the Internal Revenue Code for non-corporate taxpayers. Gains and losses are netted within each tax rate group (e.g., the 15% rate group). The facts of this question have already performed this step for us.
Short-term Capital Gains and Losses
If there are any short-term capital losses (this includes any short-term capital loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates.
Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% rate group (e.g., collectibles).
Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g., un-recaptured Section 1250 gains).
Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g., 15%) tax rate.
Long-term Capital Gains and Losses
If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group.
If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.
In this case, we are given net short-term capital losses of $70,000 to start with. Following the rules above, this first goes to offset any short-term gains at the ordinary income rates, but there are none in the facts. So, the next step is to offset the losses against any 28% rate gain long-term capital gains. The facts provide that there is $10,000 in gains from collectibles (taxable at the 28% rate). The remaining short-term loss ($60,000) is next used to offset the long-term capital gains at the 25% rate. The facts give us un-recaptured Section 1250 gains of $56,000 (taxed at the 25% tax rate). The remaining short-term capital loss is $4,000 ($70,000 - $10,000 - $56,000 = $4,000). The balance of the short-term capital losses is finally used to offset any capital gains taxed at the 15% tax rate, which the facts give us as $20,000. Therefore, after the $4,000 remaining short-term capital loss is applied to offset the $20,000 long-term capital gain taxed at the 15% tax rate, there is an amount of $16,000 remaining of long-term capital gains to be taxed at the 15% tax rate.
Choices “a”, “c”, and “d” are incorrect, per the ordering rules discussed above.
Dunn received 100 shares of stock as a gift from Dunn’s grandparent. The stock cost Dunn’s grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?
a.
$3,000 gain.
b.
$3,000 loss.
c.
$2,000 gain.
d.
$0
Choice “d” is correct. To determine the amount of gain or loss that should be reported on the sale of gifted property, a determination must be made as to whether the property is sold at a gain or a loss. The stock in this question has a $27,000 value which is less than its $32,000 cost. The basis for gain is the adjusted basis of the donor on the date of gift, or $32,000. However, the stock is sold for $29,000, which is not at a gain. The basis for loss is the lower of the adjusted basis or the fair market value on the date of gift, or $27,000. However, the stock is not sold at a loss. In this situation, neither gain nor loss is recognized, and the “middle” basis of the subsequent sales price is used.
Choice “c” is incorrect. The stock is not sold at a gain. The basis would have had to be $27,000 for the stock to be sold at a $2,000 gain ($29,000 - $27,000). That is the fair market value on the date of gift, but it is not the basis used when the property gifted is sold at a gain.
Choice “a” is incorrect. The stock is not sold at a gain. The basis would have had to be $26,000 for the stock to be sold at a $3,000 gain ($29,000 - $26,000). It is difficult to determine how that basis could have been calculated.
Choice “b” is incorrect. The stock is not sold at a loss. The basis would have had to be $32,000 for the stock to be sold at a $3,000 loss ($29,000 - $32,000). That is the adjusted basis of the stock, but it is not the basis used when the property gifted is sold at a loss.
Which of the following items is a capital asset?
a.
Real property used in a trade or business.
b.
Accounts receivable for inventory sold.
c.
Depreciable business property.
d.
An automobile for personal use.
Choice “d” is correct. An automobile for personal use is a capital asset.
Choice “c” is incorrect. Depreciable business property is a Section 1231 asset, not a capital asset.
Choice “b” is incorrect. Accounts receivable for inventory sold is an ordinary income asset, just like the original inventory.
Choice “a” is incorrect. Real property used in a trade or business is a Section 1231 asset, not a capital asset.
Which of the following is a capital asset?
a.
Inventory held primarily for sale to customers.
b.
Land held as an investment.
c.
Accounts receivable.
d.
A computer system used by the taxpayer in a personal accounting business.
Rule: Capital assets include property (real and personal) held by the taxpayer forinvestment, such as:
Personal automobile of the taxpayer
Furniture and fixtures in the home of the taxpayer
Stocks and securities of all types (except those held by dealers)
Personal property of a taxpayer not used in a trade or business
Real property not used in a trade or business
Interest in a partnership
Goodwill of a corporation
Copyrights, literary, musical, or artistic compositions purchased
Other assets held for investment
Items that are NOT capital assets include:
Property normally included in inventory or held for sale to customers in the ordinary course of business
Depreciable personal property and real estate used in a trade or business
Accounts and notes receivable arising from sales or services in the taxpayer’s business
Copyrights, literary, musical, or artistic compositions held by the originalartist (with the exception of musical compositions held by the original artist)
Treasury stock (not an ordinary asset and not subject to capital gains treatment)
Choice “b” is correct. Per the above information and rule, real property not used in a trade or business (e.g., land held for investment) is a capital asset.
Choice “a” is incorrect. Per the above information, property normally included in inventory or held for sale to customers in the ordinary course of business is NOT a capital asset.
Choice “c” is incorrect. Per the above information, accounts and notes receivable arising from sales or services in the taxpayer’s business are NOT capital assets.
Choice “d” is incorrect. Per the above information, depreciable personal property and real estate used in a trade or business (such as a computer system) is NOT a capital asset.
A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?
a.
A road grader held in inventory for another road grader.
b.
The company jet for a large truck to be used in the corporation.
c.
Investment securities for antiques to be held as investments.
d.
A corporate office building for a vacant lot.
Rule: Nonrecognition treatment is accorded to a “like-kind” exchange of property used in the trade or business or held for investment (with the exception of inventory, stock, securities, partnership interests, and real property in different countries). “Like-kind” means the same type of investment (e.g., realty for realty or personalty for personalty, assuming the personal property falls within the same “asset class” for tax depreciation purposes).
Choice “d” is correct. The exchange of a corporate office building for a vacant lot qualifies for like-kind nonrecognition treatment. It is the exchange of realty for realty of property used in the trade or business or held for investment.
Choice “b” is incorrect. Although this answer option exchanges personal property used in a trade or business, the “asset classes” for the corporate jet and the heavy equipment differ.
Choice “c” is incorrect. The exchange of investment securities for antiques to be held as investments does not qualify for nonrecognition treatment. It is one of the exceptions identified in the rule, above.
Choice “a” is incorrect. The exchange of a road grader held in inventory for another road grader does not qualify for nonrecognition treatment. It is one of the exceptions identified in the rule, above.
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett’s basis in the equipment?
a.
$36,000
b.
$32,000
c.
$31,000
d.
$35,000
Rule: Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid attributable to the appreciation in the value of the gift (but the facts in this case indicate to ignore gift tax consequences). There is an exception to the general rule: if the fair market value at the date of gift is lower than the roll-over cost basis from the donor, the basis for the donee depends upon the donee’s future selling price of the asset.
The asset may sell for (1) greater than the donor’s basis, (2) between the donor’s basis and the lower FMV at the date of gift, or (3) less than the FMV at the date of gift.
Choice “c” is correct. The first step is to determine the donor’s basis in the asset at the gift date. In this case, the basis is $31,000 ($35,000 + $1,000 - $5,000). The fair market value of the asset is $32,000 at the date of gift, which is greater than the donor’s basis, so the general rule applies. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Thus, Russett’s basis in the equipment is $31,000.
Choice “b” is incorrect. The first step is to determine the donor’s basis in the asset at the gift date. In this case, the basis is $31,000 ($35,000 + $1,000 - $5,000). The fair market value of the asset is $32,000 at the date of gift, which is greater than the donor’s basis, so the general rule applies. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Thus, Russett’s basis in the equipment is $31,000 (the cost basis of the donor), not the $32,000 fair market value at the date of gift.
Choice “d” is incorrect. This answer option incorrectly assumes the basis is only the $35,000 purchase price of the asset and ignores the $1,000 in improvements and the basis reduction for the $5,000 in accumulated depreciation.
Choice “a” is incorrect. This answer option incorrectly assumes the basis is only the $35,000 purchase price of the asset plus the $1,000 in improvements and ignores the basis reduction for the $5,000 in accumulated depreciation.
A taxpayer trades in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss realized by the taxpayer on this transaction?
a.
$0
b.
$3,000 loss
c.
$3,000 gain
d.
$15,000 loss
Calculations for “Realized Gain with No Boot”
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $18,000 depreciation)
=
$20,000 fair market value of new auto − $17,000 adjusted basis of old auto
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$0 (the lesser of gain realized of $3,000 or boot received of $0)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized
=
$17,000 + $0
=
$17,000
Alternate calculation: $20,000 FMV new property − $3,000 deferred gain = $17,000 basis new property.
Choice “c” is correct. A $3,000 gain is realized on the transaction [fair market value of the new auto, $20,000 − $17,000, the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation)].
Choice “a” is incorrect. $0 is the gain/loss recognized (the lesser of gain realized of $3,000 or boot received of $0), not the gain realized. This is also the difference in fair market value between old and new autos.
Choice “b” is incorrect. There is a $3,000 gain, not a loss [fair market value of the new auto, $20,000 − $17,000, the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation)].
Choice “d” is incorrect. $15,000 loss is the difference between the $35,000 cost of the old auto and $20,000 fair market value of the new auto. This calculation ignores the accumulated depreciation in determining the carrying value of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss recognized by the taxpayer on this transaction?
a.
$3,000 gain
b.
$0
c.
$15,000 loss
d.
$3,000 loss
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $18,000 depreciation)
=
$20,000 fair market value of new auto − $17,000 adjusted basis of old auto
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$0 (the lesser of gain realized of $3,000 or boot received of $0)
Basis of New Property:
=
New basis
=
Adjusted basis of property given up + Gain recognized
=
$17,000 + $0
=
$17,000
Alternate calculation: $20,000 FMV new property − $3,000 deferred gain = $17,000 basis of new property.
Choice “b” is correct. $0 is the recognized (lesser of gain realized of $3,000 or boot received of $0).
Choice “d” is incorrect. There is a $3,000 gain, not a loss [fair market value of the new auto, $20,000 − $17,000, the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation)].
Choice “a” is incorrect. A $3,000 gain is realized on the transaction, but is not recognized [fair market value of the new auto, $20,000 − $17,000, the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation)].
Choice “c” is incorrect. $15,000 loss is the difference between the $35,000 cost of the old auto and $20,000 fair market value of the new auto. This calculation ignores the accumulated depreciation in determining the carrying value of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the taxpayer’s basis in the new automobile received?
a.
$17,000
b.
$20,000
c.
$18,000
d.
$35,000
Calculations for “New Basis on Like Kind-Exchange Property with No Boot”
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $18,000 depreciation)
=
20,000 fair market value of new auto − $17,000 adjusted basis of old auto
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$0 (the lesser of gain realized of $3,000 or boot received of $0)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized
=
$17,000 + $0
=
$17,000
Alternate calculation: $20,000 FMV new property − $3,000 deferred gain = $17,000 basis of new property.
Choice “a” is correct. $17,000 is the substituted basis [the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation) + gain recognized $0].
Choice “c” is incorrect. $18,000 is accumulated depreciation on the old auto.
Choice “b” is incorrect. $20,000 is the fair market value of both the old and new autos.
Choice “d” is incorrect. $35,000 is the original cost of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $12,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss realized by the taxpayer on this transaction?
a.
$3,000 gain
b.
$3,000 loss
c.
$15,000 loss
d.
$0
Calculations for “Realized Loss with No Boot”
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $12,000 depreciation)
=
$20,000 fair market value of new auto − $23,000 adjusted basis of old auto
=
$3,000 loss
Gain/Loss Recognized:
Loss recognized
=
$0 (Realized loss is never recognized in like-kind exchanges.)
Basis of New Property:
=
New basis
=
Adjusted basis of property given up
=
$23,000 + $0
=
$23,000
Alternate calculation: $20,000 FMV new property + $3,000 deferred loss = $23,000 basis of new property.
Choice “b” is correct. The taxpayer realizes a $3,000 loss (fair market value of new auto $20,000 − $23,000 adjusted basis of old auto).
Choice “d” is incorrect. $0 is the gain/loss recognized (the lesser of gain realized of $3,000 or boot received of $0), not the gain realized. This is also the difference in fair market value between old and new autos.
Choice “a” is incorrect. There is a $3,000 loss, not a $3,000 gain.
Choice “c” is incorrect. $15,000 loss is the difference between the $35,000 cost of the old auto and $20,000 fair market value of the new auto. This calculation ignores the accumulated depreciation in determining the carrying value of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $12,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss recognized by the taxpayer on this transaction?
a.
$0
b.
$15,000 loss.
c.
$3,000 loss.
d.
$3,000 gain.
Calculations for “Recognized Loss with No Boot”
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $12,000 depreciation)
=
$20,000 fair market value of new auto − $23,000 adjusted basis of old auto
=
$3,000 loss
Gain/Loss Recognized:
Loss recognized
=
$0 (Realized loss is never recognized in like-kind exchanges.)
Basis of New Property:
=
New basis
=
Adjusted basis of property given up
=
$23,000 + $0
=
$23,000
Alternate calculation: $20,000 FMV new proerty + $3,000 deferred loss = $23,000 basis of new property.
Choice “a” is correct. $0 is recognized (a realized loss is never recognized in like-kind exchange.)
Choice “c” is incorrect. A $3,000 loss is realized on the transaction, but is not recognized [fair market value of the new auto, $20,000 − $23,000, the adjusted basis of the old auto ($35,000 cost − $12,000 accumulated depreciation)].
Choice “d” is incorrect. There is a $3,000 realized loss, not a $3,000 gain. The $3,000 loss is also not recognized.
Choice “b” is incorrect. $15,000 loss is the difference between the $35,000 cost of the old auto and $20,000 fair market value of the new auto. This calculation ignores the accumulated depreciation in determining the carrying value of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $12,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the taxpayer’s basis in the new automobile received?
a.
$23,000
b.
$35,000
c.
$20,000
d.
$12,000
Gain/Loss Realized:
Amount realized
=
Fair market value of auto received − Adjusted basis of auto given up
=
$20,000 fair market value of new auto − ($35,000 cost − $12,000 depreciation)
=
$20,000 fair market value of new auto − $23,000 adjusted basis of old auto
=
$3,000 loss
Gain/Loss Recognized:
Loss recognized
=
$0 (Realized loss is never recognized in like-kind exchanges.)
Basis of New Property:
=
New basis
=
Adjusted basis of property given up
=
$23,000 + $0
=
$23,000
Alternate calculation: $20,000 FMV new property + $3,000 deferred loss = $23,000 basis of new property.
Choice “a” is correct. The basis for the new auto is $23,000, the adjusted basis of the old auto ($35,000 cost − $12,000 accumulated depreciation).
Choice “d” is incorrect. $12,000 is amount of accumulated depreciation on the old auto.
Choice “c” is incorrect. $20,000 is fair market value of both the old auto and the new auto.
Choice “b” is incorrect. $35,000 is the original cost of the old auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $22,000, so the taxpayer has agreed to pay $2,000 cash in addition to the trade-in. What is the gain or loss realized by the taxpayer on this transaction?
a.
$0
b.
$2,000 gain
c.
$5,000 gain
d.
$3,000 gain
Gain/Loss Realized:
Amount realized
=
(Fair market value of auto received − boot paid) − Adjusted basis of auto given up
=
($22,000 fair market value new auto − $2,000 boot paid) − ($35,000 cost of old auto − $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 + Boot paid
=
$17,000 + $2,000
=
$19,000
Alternate calculation: $22,000 FMV new property − $3,000 deferred gain = $19,000 basis new property.
Choice “d” is correct. A $3,000 gain is realized on the transaction [fair market value of the new auto, $22,000 − boot paid of $2,000 − $17,000, the adjusted basis of the old auto ($35,000 cost − $18,000 accumulated depreciation)].
Choice “a” is incorrect. $0 is the gain/loss recognized (the lesser of the $3,000 gain realized or the boot received of $0), not the gain realized.
Choice “b” is incorrect. $2,000 is the difference between the fair market value of the old auto and the fair market value of the new auto, not the gain realized. It is also the amount of boot paid (not received).
Choice “c” is incorrect. $5,000 gain would be the gain realized, if the boot of $2,000 was ignored.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $22,000, so the taxpayer has agreed to pay $2,000 cash in addition to the trade-in. What is the gain or loss recognized by the taxpayer on this transaction?
a.
$3,000 gain
b.
$0
c.
$2,000 gain
d.
$5,000 gain
Calculations for “Recognized Gain with Boot Paid in Cash or Non-Like-Kind Property”
Gain/Loss Realized:
Amount realized
=
(Fair market value of auto received - Boot paid) - Adjusted basis of auto given up
=
($22,000 fair market value new auto - $2,000 boot paid) -
($35,000 cost of old auto - $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 + boot paid
=
$17,000 + $2,000
=
$19,000
Alternate calculation: $22,000 FMV new property - $3,000 deferred gain = $19,000 basis of new property.
Choice “b” is correct. $0 of gain is recognized (the lesser of gain realized of $3,000 and boot received of $0).
Choice “c” is incorrect. $2,000 is the difference between the fair market value of the old auto and the fair market value of the new auto. It is also the amount of boot paid (not received).
Choice “a” is incorrect. $3,000 is the gain realized, not the gain recognized.
Choice “d” is incorrect. A $5,000 gain would be realized if the boot paid of $2,000 was ignored [fair market value of the new auto of $22,000 - adjusted basis of the old auto of $17,000 ($35,000 cost - $18,000 depreciation)].
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $22,000. The taxpayer has agreed to pay $2,000 cash in addition to the trade-in. What is the taxpayer’s basis in the new automobile received?
a.
$17,000
b.
$20,000
c.
$22,000
d.
$19,000
Calculations for “New Basis of Like-Kind Property with Liabilities Assumed (Boot Paid)”
Gain/Loss Realized:
Amount realized
=
(Fair market value of auto received - Boot paid) - Adjusted basis of auto given up
=
($22,000 fair market value new auto - $2,000 boot paid) - ($35,000 cost of old auto - $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 + boot paid
=
$17,000 + $2,000
=
$19,000
Alternate calculation: $22,000 FMV new property - $3,000 deferred gain = $19,000 basis of new property.
Choice “d” is correct. $19,000 is the basis of the new auto ($17,000 adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation) + $2,000 boot paid).
Choice “a” is incorrect. $17,000 is the adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation). The boot paid must also be included in the new basis.
Choice “b” is incorrect. $20,000 is the fair market value of the old auto.
Choice “c” is incorrect. $22,000 is the fair market value of the new auto.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto. What is the gain or loss realized by the taxpayer on this transaction?
a.
$500 loss
b.
$3,000 gain
c.
$3,500 gain
d.
$3,500 loss
Calculations for “Realized Gain with Boot Received (Of Non-Like-Kind Property)”
Gain/Loss Realized:
Amount realized
=
Fair market value of new auto + Boot received - Adjusted basis of auto given up
=
$16,500 fair market value new auto + $3,500 fair market value of trailer - $17,000
adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized - Boot received
=
$17,000 + $3,000 + $0 - $3,500
=
$16,500
Alternate calculation: $16,500 FMV new property + $0 deferred loss - $0 deferred gain = $16,500 basis of new property.
Choice “b” is correct. A $3,000 gain is realized on the transaction [fair market value of the new auto, $16,500 + $3,500 of boot received - $17,000, the adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation)].
Choice “c” is incorrect. $3,500 is fair market value of boot received, not the gain realized.
Choice “a” is incorrect. $500 loss would be realized if the boot received of $3,500 was ignored.
Choice “d” is incorrect. $3,500 is the difference between the fair market value of the old auto and the fair market value of the new auto. $3,500 is also the fair market value of the boot received.
A taxpayer is trading in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto. What is the gain or loss recognized by the taxpayer on this transaction?
a.
$3,500 gain.
b.
$3,500 loss.
c.
$0
d.
$3,000 gain.
Calculations for “Recognized Gain with Boot Received (Of Non-Like-Kind Property)”
Gain/Loss Realized:
Amount realized
=
Fair market value of new auto + Boot received - Adjusted basis of auto given up
=
$16,500 fair market value new auto + $3,500 fair market value of trailer - $17,000
adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation)
=
$3,000 gain
Gain/Loss Recognized:
Gain recognized
=
$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)
Basis of New Property:
New basis
=
Adjusted basis of property given up + Gain recognized - Boot received
=
$17,000 + $3,000 + $0 - $3,500
=
$16,500
Alternate calculation: $16,500 FMV new property + 0 deferred loss - $0 deferred gain = $16,500 basis of new property.
Choice “d” is correct. A gain of $3,000 is recognized on the transaction (the lesser of $3,000 gain realized and $3,500 fair market value of boot received).
Choice “a” is incorrect. $3,500 is the fair market value of boot received. The gain recognized is lesser of gain realized and fair market value boot received.
Choice “c” is incorrect. $0 would be the gain recognized if boot was paid instead of received.
Choice “b” is incorrect. A $3,500 loss would result from a monetary exchange of assets with values of $20,000 and $16,500 for the old and new assets, respectively.
