Chapter 10

Question 1

Taxpayers can dispose of assets in what ways?

Answer 1

sell, trade, scrap, casualty, donation

Question 2

To calculate gain or loss must know …

Answer 2

amount realized and adjusted basis of each asset

Question 3

Every asset disposition triggers a…

Answer 3

realization event for tax purposes

Question 4

For every asset disposition what must be calculated?

Answer 4

a gain or loss

Question 5

What is amount realized by a taxpayer from the sale or other disposition of an asset?

Answer 5

lis everything of value received from the buyer less any selling costs

Question 6

Taxpayers typically receive _____ when they sell property

Answer 6

Cash

Question 7

Besides cash, taxpayers may accept what other things in exchange for property?

Answer 7

marketable securities, notes receivable, similar assets, or any combination of these items as payment.

Question 8

Amount realized =

Answer 8

Cash received + Fair market value of other property + Buyer’s assumption of liabilities - Seller’s expenses

Question 9

Scrap-Happy Inc., a scrapbooking retail chain, owns a warehouse which is subject to a $50,000 mortgage. A manufacturing company offers to purchase the warehouse for $15,000 cash and a $30,000 note receivable, as well as assume the mortgage. If Scraphappy accepts this offer, and pays $1,500 in selling expenses, what is the amount realized?

Answer 9

50,000 liability assumed

+ 15,000 cash

+ 30,000 note receivable

_ – 1,500 selling expenses_

$ 93,500 Amount Realized

Question 10

Adjusted Basis

Answer 10

Original basis reduced by depreciation or other types of cost recovery deductions taken against the property.

Question 11

Adjusted basis =

Answer 11

Cost basis - Cost recovery deductions

Question 12

Scrap-Happy owns a computer (5 yr MACRS recovery period ) which they purchased 2 years ago for $1,200. For financial statement purposes, they depreciate the computer over 3 years using the half-year convention and straight line method, with no salvage value. What is their adjusted book and tax bases for the computer (after 2 years of depreciation)?

Answer 12

Book Tax

Cost Basis: $1,200 $1,200

     Yr 1 Dep. (HY):    (200)              (240)

     Yr 2 Dep.:           _(400)_              _(384)_

  Adjusted Basis:    $600              $576

Question 13

The amount of gain or loss taxpayers realize on a sale or other disposition of assets is…

Answer 13

the amount they realize minus their adjusted basis in the disposed assets

Question 14

Gain or (loss) realized =

Answer 14

Amount realized - Adjusted basis

Question 15

Scrap-Happy sells the computer in the previous example (adjusted tax basis = $576) for $400. What is their realized gain or (loss) on the sale?

Answer 15

$400 Amount realized

(576) Adjusted basis

                       ($176)   (Loss) realized

Question 16

Gain (loss) realized =

Answer 16

Amount realized - Adjusted basis

Question 17

Amount realized =

Answer 17

Cash received + Fair market value of other property + Buyer’s assumption of seller’s liabilities - Seller’s expenses

Question 18

Adjusted basis =

Answer 18

Cost basis - Cost recovery deductions

Question 19

Recognizing gains (losses) do what to gross income?

Answer 19

increase taxpayers’ (decrease) gross income

Question 20

When must taxpayers recognize the vast majority of realized gains and losses?

Answer 20

Immediately

Question 21

T/F Taxpayers are not allowed to permanently exclude the gains from taxable income?

Answer 21

False: They may be allowed to permanently exclude the gains from taxable income.

Question 22

How does the trade or business of an asset depend on it’s holding period?

Answer 22

If the holding period is short-term (one year or less), it’s ordinary.

If the holding period is long-term (more than one year), it’s section 1231

Question 23

A short-term asset is also known as what kind of investment or personal-use asset?

Answer 23

Short-term Capital

Question 24

Ordinary Assets

Answer 24

• Assets created or used in a taxpayer’s trade or business.
• Business assets held for less than a year

Question 25

Examples of ordinary assets

Answer 25

* Inventory * Accounts receivable * Machinery * Equipment

Question 26

If taxpayers sell ordinary assets at a gain, how do they recognize it?

Answer 26

They recognize an ordinary gain that is taxed at ordinary rates.

Question 27

If taxpayers sell ordinary assets at a loss, how do they recognize it?

Answer 27

They deduct the loss against other ordinary income.

Question 28

Capital assets

Answer 28

Assets held for investment, for the production of income, or for personal use

Question 29

Qualification as capital asset depends on what?

Answer 29

The purpose for which taxpayers use the asset

Question 30

Both individuals and corporate taxpayers prefer capital gains or ordinary income?

Answer 30

Capital gains

Question 31

If the taxpayer type are idividuals, what are the preferential rates?

Answer 31

_Preferential Rates_ * Most capital gains taxed at 15 percent (0 percent to the extent the gain would have been taxed at a 15 percent or lower rate if it were ordinary income). * Unrecaptured Sec. 1250 gains taxed at a maximum rate of 25 percent. * Gains on collectibles held for more than a year taxed at a maximum rate of 28 percent.

Question 32

If the taxpayer type are corporations, what are the preferential tax rates?

Answer 32

No preferential rates, taxed at ordinary income

Question 33

If the taxpayer type are individuals, what are the loss limitations?

Answer 33

* Individuals may annually deduct up to $3,000 of net capital losses against ordinary income. * Losses carried forward indefinitely but not carried back.

Question 34

If the taxpayer type are corporations, what are the loss limitations?

Answer 34

* No offset against ordinary income. * Net capital losses can generally be carried back three years and forward five years to offset gains in those years.

Question 35

§1231 Assets

Answer 35

Depreciable assets and land used in a trade or business (including rental property) held for more than one year.

Question 36

If the taxpayer recognizes a nes Sec. 1231 gain, the net gain is treated as ...

Answer 36

a long-term capital gain.

Question 37

If the taxpayer recognizes a net Sec. 1231 loss, the net loss is treated as...

Answer 37

an ordinary loss.

Question 38

Sec 1231 gains on individual depreciable assets may be recharacterized as...

Answer 38

ordinary income under the depreciation recaptue rules.

Question 39

Depreciation recapture potentially applies to...

Answer 39

gains (not losses) on the sale of depreciable or amortizable business property.

Question 40

When depreciation recapture is applied, it recharachterizes the gain on the sale of a...

Answer 40

Sec. 1231 asset.

Question 41

Depreciation recapture does not affect...

Answer 41

Sec. 1231 losses.

Question 42

Computation depends on the type of...

Answer 42

Sec. 1231 assets the taxpayer is selling (personal or real property).

Question 43

Depreciation recapture changes only the character but not the...

Answer 43

amount of gain that taxpayers recognize when they sell a depreciable asset.

Question 44

What are the three types of Sec. 1231 assets?

Answer 44

* Pure Sec. 1231 * Sec. 1245 * Sec. 1250

Question 45

Pure Sec. 1231 consists of...

Answer 45

land.

Question 46

Sec. 1245 consists of...

Answer 46

Personal property and intangibles.

Question 47

Sec. 1250 consists of...

Answer 47

Depreciable real property.

Question 48

Personal property and amortizable intangible assets are ______ assets.

Answer 48

Sec. 1245

Question 49

For depreciation recapture concerning Sec. 1245, you will take the lesser of...

Answer 49

* gain recognized or * accumulated depreciation is recaptured (characterized) as ordinary income under Sec. 1245.

Question 50

Any remaining gain from Sec. 1245 property for recapture is...

Answer 50

Sec. 1231 gain.

Question 51

For Sec. 1245 property, there is no depreciation recapture on...

Answer 51

assets sold at a loss.

Question 52

When taxpayers sell or dispose of §1245 property, they encounter one of the following three scenarios of gain or loss:

Answer 52

* recognize a gain created solely through depreciation deductions * recognize a gain created through both depreciation deductions and actual asset appreciation * recognize a loss

Question 53

Scrap-Happy sells a machine with an adjusted basis of $6,000 for $10,000. Depreciation taken on the machine amounts to $2,500. What amount of gain is recaptured as ordinary and what amount is §1231 gain?

Answer 53

$10,000 Selling price _– 6,000_ Adjusted basis $4,000 Gain realized Depreciation recapture = Lesser of: * Depreciation taken: $2,500 * Gain realized: $4,000 ``` Depreciation recapture (ordinary income) = $2,500 §1231 gain (capital gain) = $4,000 Gain realized ``` _– 2,500_ Depr recapture $1,500 §1231 gain

Question 54

Depreciable real property (an office building or a warehouse), sold at a gain is subject to...

Answer 54

recapture called §1250 depreciation recapture

Question 55

A modified version of the recapture rules called §291 depreciation recapture applies to...

Answer 55

corporations but not to other types of taxpayers

Question 56

§291, corporations selling depreciable real property recapture as what as ordinary income?

Answer 56

20% of the lesser of the recognized gain or the accumulated depreciation.

Question 57

Depreciable real property sold at a gain is §1250 property, but is no longer subject to...

Answer 57

§1250 recapture

Question 58

The gain that would be §1245 recapture if the asset were §1245 property is called what?

Answer 58

Unrecaptured §1250 gain

Question 59

Unrecaptured §1250 gain is §1231 gain that, if ultimately characterized as a long-term capital gain, is taxed at a maximum rate of...

Answer 59

25%

Question 60

All gain recognized from selling property i.e., a depreciable asset to a related-party buyer is...

Answer 60

ordinary income.

Question 61

T/F: Seller is required to recognize ordinary income for depreciation deductions the buyer will receive in the future

Answer 61

True

Question 62

The tax laws are designed to provide symmetry between the character of deductions an asset generates and the character of income the asset generates when...

Answer 62

it is sold

Question 63

What are other provisions affecting the rate at which gains are taxed concerning relatives?

Answer 63

Includes family relationships including siblings, spouses, ancestors, and lineal descendants

Question 64

What's a provision affecting the rate at which gains are taxed concerning individuals and a corporation?

Answer 64

Also includes an individual and a corporation if the individual owns more than 50 percent of the stock of the corporation, a partnership and any of its partners, and an S corporation and any of its shareholders

Question 65

What are 3 ways taxpayers could benefit from Calculating Net §1231 Gains or Losses?

Answer 65

* accelerating losses into year 1 * deferring gains until year 2 * characterizing the gains and losses due to the §1231 netting process

Question 66

§1231 Look-Back Rule

Answer 66

* A nondepreciation recapture rule * Affects the character but not the amount of gains on which a taxpayer is taxed

Question 67

T/F: Gains and losses from individual asset dispositions are annually netted together?

Answer 67

True

Question 68

Net §1231 gains may be recharacterized as ordinary income under the...

Answer 68

§1231 look-back rule

Question 69

Illustrate the Sec. 1231 netting process.

Answer 69

See picture:

Question 70

For an exchange to qualify as a like-kind exchange for tax purposes, the transaction must meet the following three criteria

Answer 70

* The property is exchanged “solely for like-kind” property. * Both the property given up and the property received in the exchange by the taxpayer are either “used in a trade or business” or are “held for investment,” by the taxpayer * The “exchange” must meet certain time restrictions

Question 71

Definition for like-kind property for Real Property

Answer 71

Used in a trade or business or held for investment is considered “like- kind” with other real property used in a trade or business or held for investment

Question 72

Definition of like-kind property for personal property

Answer 72

Considered “like-kind” if it has the same general use and is used in a business or held for investment

Question 73

Property Ineligible for Like-Kind Treatment includes:

Answer 73

Includes inventory, most financial instruments, partnerships interests, domestic property exchanged for property used in a foreign country and all property used in a foreign country

Question 74

What are the property use and timing requirements for a like-kind exchange?

Answer 74

* Like-kind property exchanges may involve intermediaries * Taxpayers must identify replacement “like-kind” property within 45 days of giving up their property

Question 75

“Like-kind” property must be received within \_\_\_ days of when the taxpayer transfers property in a “like-kind” exchange

Answer 75

180

Question 76

Make a diagram of deferred or starker exchange.

Answer 76

See picture:

Question 77

Non-like-kind property is known as \_\_\_\_

Answer 77

boot

Question 78

What happens when boot is given as part of a like-kind transaction?

Answer 78

The asset received is recorded in two parts: property received in exchange for like-kind property and property received in a sale (bought by the boot)

Question 79

What happens when a boot is received?

Answer 79

* Boot received usually creates recognized gain * Gain recognized is lesser of gain realized or boot received

Question 80

The basis of the boot received is the \_\_\_\_ ______ \_\_\_\_\_ of the boot.

Answer 80

fair market value

Question 81

Basis in like-kind property =

Answer 81

Fair market value of like-kind property received - deferred gain + deffered loss

Question 82

Gain is deferred when appreciated property is involuntarily converted in an...

Answer 82

accident or natural disaster.

Question 83

Basis of property directly converted is carried over from...

Answer 83

the old property to the new property.

Question 84

In an indirect conversion, gain recognized is the lesser of:

Answer 84

Gain realized, or Amount of reimbursement the taxpayer does not reinvested in qualified property

Question 85

Qualified replacement property must be of a similar or related use to the...

Answer 85

original property

Question 86

Installment Sales

Answer 86

Sale of property where the seller receives the sale proceeds in more than one period

Question 87

T/F: Concerning installment sales, you must recognize a portion of gain on each installment payment received.

Answer 87

True

Question 88

Gross profit percentage =

Answer 88

Gain realized/Amount realized

Question 89

Inventory, marketable securities, and depreciation recapture cannot be accounted for under...

Answer 89

installment sale rules.

Question 90

Installment sale rules do not apply to...

Answer 90

losses.