E.41 Tax consequences of property transactions Flashcards
(21 cards)
Which of the following is NOT a type of property transaction that can have tax consequences?
A) Sale of a principal residence
B) Exchange of like-kind property
C) Transfer of a gift
D) Renting out a vacation home
Renting out a vacation home. While renting out a vacation home is a property transaction, it is not a type of property transaction that triggers tax consequences.
E.41 Tax consequences of property transactions
What is the tax treatment of a gain on the sale of a principal residence?
A) Fully taxable
B) Partially taxable
C) Non-taxable
D) Taxable at the capital gains rate
Non-taxable. A gain on the sale of a principal residence is generally non-taxable up to a certain amount, depending on the taxpayer’s filing status and whether they meet certain ownership and use requirements.
E.41 Tax consequences of property transactions
Which of the following property transactions is NOT eligible for tax-deferred treatment under Section 1031 of the Internal Revenue Code?
A) Exchange of real estate for like-kind real estate
B) Exchange of a business vehicle for another business vehicle
C) Exchange of artwork for other artwork
D) Exchange of rental property for other rental property
Exchange of artwork for other artwork. Section 1031 of the Internal Revenue Code allows for tax-deferred treatment of certain property exchanges, but it only applies to exchanges of like-kind property used for business or investment purposes.
E.41 Tax consequences of property transactions
Which of the following is a tax consequence of a gift of appreciated property?
A) The donor must pay gift tax on the appreciated value of the property
B) The donee must pay income tax on the appreciated value of the property
C) The donor must pay income tax on the appreciated value of the property
D) The donee receives a step-up in basis for the appreciated value of the property
The donee receives a step-up in basis for the appreciated value of the property. When a donor gifts appreciated property, the donee receives a step-up in basis equal to the fair market value of the property at the time of the gift. This can reduce or eliminate the potential capital gains tax the donee would owe if they later sell the property.
E.41 Tax consequences of property transactions
Under what circumstances can a taxpayer deduct losses from a rental property?
A) When the taxpayer actively participates in managing the rental property
B) When the rental property is used as a vacation home for part of the year
C) When the rental property is held for investment purposes only
D) When the rental property generates a profit in at least three out of five consecutive years
When the taxpayer actively participates in managing the rental property. In order to deduct losses from a rental property, the taxpayer must actively participate in managing the property and meet certain other criteria. If the taxpayer does not actively participate, the losses may be subject to passive activity loss limitations.
E.41 Tax consequences of property transactions
What is the tax treatment of a loss on the sale of a principal residence?
A) Fully deductible
B) Partially deductible
C) Non-deductible
D) Deductible at the capital loss rate
Non-deductible. A loss on the sale of a principal residence is generally non-deductible for tax purposes.
E.41 Tax consequences of property transactions
Which of the following is NOT a requirement for a property exchange to qualify for tax-deferred treatment under Section 1031 of the Internal Revenue Code?
A) The exchanged properties must be like-kind
B) The taxpayer must hold the exchanged properties for at least one year
C) The exchange must be completed within a certain time period
D) The exchange must be conducted through a qualified intermediary
The taxpayer must hold the exchanged properties for at least one year. While the holding period of the exchanged properties is relevant for other tax purposes, it is not a requirement for a property exchange to qualify for tax-deferred treatment under Section 1031 of the Internal Revenue Code.
E.41 Tax consequences of property transactions
Which of the following is a tax consequence of selling rental property?
A) The taxpayer may be subject to recapture of depreciation
B) The taxpayer may be subject to gift tax
C) The taxpayer may be subject to estate tax
D) The taxpayer may be subject to capital gains tax
The taxpayer may be subject to capital gains tax. When a taxpayer sells rental property, they may be subject to capital gains tax on any gain realized from the sale. Additionally, they may also be subject to recapture of depreciation, which is taxed at a different rate than capital gains.
E.41 Tax consequences of property transactions
Which of the following is NOT a factor that can affect a taxpayer’s basis in a property?
A) The original purchase price of the property
B) The cost of any improvements made to the property
C) The fair market value of the property at the time of inheritance
D) The amount of mortgage interest paid on the property
The amount of mortgage interest paid on the property. While mortgage interest can be a significant expense associated with owning a property, it does not affect the taxpayer’s basis in the property.
E.41 Tax consequences of property transactions
What is the tax treatment of a gain on the sale of a vacation home?
A) Fully taxable
B) Partially taxable
C) Non-taxable
D) Taxable at the capital gains rate
Partially taxable. A gain on the sale of a vacation home is generally taxable, but only to the extent that the gain exceeds the taxpayer’s basis in the property. Any gain up to the basis amount is non-taxable, but any gain beyond that amount is subject to capital gains tax.
E.41 Tax consequences of property transactions
John owns a rental property that he has been renting out for several years. This year, he sold the property for $200,000, realizing a gain of $50,000. What is the tax consequence of this sale?
A) John is not subject to any tax on the sale
B) John must pay capital gains tax on the full amount of the gain
C) John must pay recapture tax on the full amount of the gain
D) John must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
John must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion. When a taxpayer sells rental property, they may be subject to both capital gains tax and recapture of depreciation. In this case, John would be subject to capital gains tax on the $30,000 gain that exceeds his basis in the property, and recapture tax on the $20,000 in depreciation he claimed while renting out the property.
E.41 Tax consequences of property transactions
Sarah inherited a vacation home from her grandmother, who passed away last year. The home was worth $300,000 at the time of her grandmother’s death, and Sarah recently sold it for $350,000. What is the tax consequence of this sale?
A) Sarah is not subject to any tax on the sale
B) Sarah must pay capital gains tax on the full amount of the gain
C) Sarah must pay estate tax on the full amount of the gain
D) Sarah must pay capital gains tax on a portion of the gain
Sarah must pay capital gains tax on a portion of the gain. When a taxpayer inherits property, their basis in the property is generally the fair market value of the property at the time of the decedent’s death. In this case, Sarah’s basis in the vacation home would be $300,000. Since she sold it for $350,000, she realized a gain of $50,000. Sarah would be subject to capital gains tax on this gain, but only on the amount that exceeds her basis in the property.
E.41 Tax consequences of property transactions
Mary recently exchanged her rental property for another property of equal value, as part of a Section 1031 exchange. What is the tax consequence of this exchange?
A) Mary is not subject to any tax on the exchange
B) Mary must pay capital gains tax on the full amount of the gain
C) Mary must pay recapture tax on the full amount of the gain
D) Mary must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
Mary is not subject to any tax on the exchange. When a taxpayer participates in a Section 1031 exchange, they are able to defer recognition of any gain on the sale of their property, as long as they use the proceeds to acquire another property of equal or greater value. Mary would not be subject to any tax on the exchange itself, but she would need to consider the tax consequences if she were to sell the property she acquired in the exchange in the future.
E.41 Tax consequences of property transactions
Tom bought a piece of land for $100,000, and later sold it for $150,000, realizing a gain of $50,000. He used the proceeds from the sale to purchase another piece of land for $175,000. What is the tax consequence of this transaction?
A) Tom must pay capital gains tax on the full amount of the gain
B) Tom must pay recapture tax on the full amount of the gain
C) Tom must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D) Tom is not subject to any tax on the transaction
Tom must pay capital gains tax on the full amount of the gain. When a taxpayer sells property and uses the proceeds to acquire other property, the gain on the sale is generally taxable, even if the taxpayer reinvests the proceeds in another property. In this case, Tom realized a gain of $50,000 on the sale of the first piece of land, and he would be subject to capital gains tax on this amount.
E.41 Tax consequences of property transactions
Jack and Jill are married and jointly own a rental property. They recently sold the property for $300,000, realizing a gain of $50,000. What is the tax consequence of this sale?
A) Jack and Jill are not subject to any tax on the sale
B) Jack and Jill must each pay capital gains tax on the full amount of the gain
C) Jack and Jill must each pay recapture tax on the full amount of the gain
D) Jack and Jill must each pay capital gains tax on a portion of the gain
Jack and Jill must each pay capital gains tax on a portion of the gain. When a married couple jointly owns property, each spouse is generally treated as owning half of the property. In this case, Jack and Jill would each be subject to capital gains tax on their share of the gain, which would be $25,000 each. The actual tax rate and amount of tax owed will depend on their individual tax situations.
E.41 Tax consequences of property transactions
Kelly owns a rental property that has a basis of $150,000. She sells the property for $200,000, but she carries back a $50,000 note secured by the property. What is the tax consequence of this transaction?
A) Kelly must pay capital gains tax on the full amount of the gain
B) Kelly must pay recapture tax on the full amount of the gain
C) Kelly must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D) Kelly is not subject to any tax on the transaction
Kelly must pay capital gains tax on the full amount of the gain. When a taxpayer sells property and receives a note for all or part of the purchase price, they are still considered to have realized the full amount of the gain on the sale. In this case, Kelly realized a gain of $50,000 on the sale of the rental property, and she would be subject to capital gains tax on this amount.
E.41 Tax consequences of property transactions
Mark owns a rental property that he has been depreciating for several years. He recently sold the property for $300,000, and he had a basis in the property of $200,000. What is the tax consequence of this sale?
A) Mark must pay capital gains tax on the full amount of the gain
B) Mark must pay recapture tax on the full amount of the gain
C) Mark must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D) Mark is not subject to any tax on the transaction
Mark must pay recapture tax on the full amount of the gain. When a taxpayer sells a property that they have been depreciating, they are subject to recapture tax on the amount of depreciation that they have taken. In this case, Mark had taken depreciation deductions totaling $50,000 ($200,000 basis minus $150,000 depreciation), and he would be subject to recapture tax on this amount. The remaining $50,000 gain would be subject to capital gains tax.
E.41 Tax consequences of property transactions
Anna inherited a rental property from her grandmother, who had a basis in the property of $100,000. Anna recently sold the property for $300,000. What is the tax consequence of this sale?
A) Anna must pay capital gains tax on the full amount of the gain
B) Anna must pay recapture tax on the full amount of the gain
C) Anna is not subject to any tax on the transaction
D) Anna must pay estate tax on the value of the property
Anna must pay capital gains tax on the full amount of the gain. When a taxpayer inherits property, the basis of the property is generally the fair market value of the property on the date of the decedent’s death. In this case, Anna’s basis in the property would be $300,000, since that was the fair market value at the time of her grandmother’s death. When Anna sold the property for $300,000, she realized a gain of $200,000, and she would be subject to capital gains tax on this amount.
E.41 Tax consequences of property transactions
Jim owns a rental property that he purchased for $200,000. He recently sold the property for $300,000, but he carried back a $100,000 note secured by the property. What is the tax consequence of this transaction?
A) Jim must pay capital gains tax on the full amount of the gain
B) Jim must pay recapture tax on the full amount of the gain
C) Jim must pay capital gains tax on a portion of the gain, and recapture tax on the remaining portion
D) Jim is not subject to any tax on the transaction
Jim must pay capital gains tax on the full amount of the gain. When a taxpayer sells property and receives a note for all or part of the purchase price, they are still considered to have realized the full amount of the gain on the sale. In this case, Jim realized a gain of $100,000 on the sale of the rental property, and he would be subject to capital gains tax on this amount.
E.41 Tax consequences of property transactions
Tom and Jerry own a rental property as joint tenants with right of survivorship. The property has a basis of $200,000. If Tom dies, what is the tax consequence of the property passing to Jerry?
A) Jerry takes a basis in the property equal to Tom’s basis
B) Jerry takes a stepped-up basis in the property equal to the fair market value on the date of Tom’s death
C) Jerry must pay capital gains tax on the full amount of the gain
D) Jerry must pay estate tax on the value of the property
Jerry takes a stepped-up basis in the property equal to the fair market value on the date of Tom’s death. When property is owned by joint tenants with right of survivorship, the surviving tenant receives a stepped-up basis in the property equal to the fair market value on the date of the other tenant’s death. In this case, when Tom dies, Jerry would take a stepped-up basis in the property equal to the fair market value at the time of Tom’s death. This stepped-up basis would be used to calculate any gain or loss on a subsequent sale of the property.
E.41 Tax consequences of property transactions
John and Emma, a married couple, are evaluating their tax implications for the year. They have lived in their primary residence for 3 out of the last 5 years and find themselves in the 32% federal marginal tax bracket. This year, they made the following sales:
Their primary residence which they’ve held for 10 years, realizing a capital gain of $50,000.
A stock mutual fund which they’ve held for 7 years, realizing a capital gain of $5,000.
A baseball card collection which they’ve held for 6 years, realizing a capital gain of $2,000.
A stock which they’ve held for 13 months, realizing a capital gain of $1,000.
Based on the given data, what would be the couple’s capital gain tax liability for the year?
A) $1,200
B) $1,460
C) $1,600
D) $8,960
$1,460
Explanation: Primary Residence: A couple can exclude up to $500,000 in capital gains on the sale of their primary residence if they have lived in the house for 2 of the last 5 years. Hence, the $50,000 capital gain on the primary residence is excluded.
Stock Mutual Fund: Since it was held for more than one year, it’s a long-term capital gain. The tax rate on long-term capital gains is 15% for individuals in the 32% tax bracket. 15% of $5,000 = $750.
Baseball Card Collection: Collectibles are taxed at a maximum rate of 28% regardless of how long they are held. 28% of $2,000 = $560.
Stock: Since it was held for more than one year but less than two years, it is a short-term capital gain. It will be taxed at their ordinary income tax rate of 32%. 32% of $1,000 = $320.
Total tax liability: $750 (from mutual fund) + $560 (from baseball cards) + $320 (from stock) = $1,630. However, this isn’t one of the provided options. It seems there might be a mistake in the provided answer choices. The correct answer based on the calculations is not listed.
E.41 Tax consequences of property transactions
