INDIVIDUAL - GAINS & LOSES

Question 1

What are the 3 ways to acquire an asset?

Answer 1

1. Acquired by purchase
2. Acquired by gift
3. Acquired by inheritance

Question 2

How do you calculate the original basis of an asset acquired by purchase?

Answer 2

The Basis is the Taxpayer’s investment in a property for tax purposes.

It includes all the amounts paid (not just cash) for a property and all the costs necessary to prepare the property to be placed into service.

In other words, everything the purchaser gave up to acquire a property.

Basis can be increased or decreased by certain events.

Granting an easement is an example of an event that would decrease one’s basis in their property.

Question 3

When does a holding period begin for an asset acquired by purchase?

Answer 3

The holding begins at the time of purchase.

Question 4

Seppo bought a house. Seppo paid $450,000 cash and as part of the transaction, provided services for the benefit of the seller of the house worth $30,000. Seppo also had to pay recording fees of $3,500 connected to the purchase of the home. What is Seppo’s basis in the house?

Answer 4

Seppo’s basis in the house was $483,500.

Question 5

What property character (one of two) must you first determine to calculate the basis of an asset acquired by gift?

Answer 5

The basis will depend on the character of the property received as the gift. It is either:

Appreciated Property
Depreciated Property

This is determined by knowing:

• the giver’s adjusted basis
• the fair market value of the gifted property.

Question 6

A gift is considered Appreciated Property if the is giver’s adjusted basis is greater than the fair market value of the gifted property. True or False.

Answer 6

False.

A gift is considered Appreciated Property if the fair market value is greater than the giver’s adjusted basis for the gifted property.

Question 7

When is an acquired gift considered a Depreciated Property?

Answer 7

An acquired gift is considered Depreciated Property when the fair market value is less than the giver’s adjusted basis.

Question 8

What 2 values are considered when calculating the gift’s basis for the recipient.

Answer 8

1. The Donor’s adjusted basis
2. Some of the gift taxes paid by the donor.

The Recipient’s Basis will be used to determine taxes when the recipient sells the property.

Question 9

What is the gift exclusion amount?

Answer 9

$15,000

Question 10

What is the equation to determine Gift Tax portion that needs to be added to your adjusted basis for a received gift?

Answer 10

Fair Market Value (FMV) at the time of the gift (Donor’s basis) divided by the Amount of the gift AFTER the Gift Exclusion (which is $15,000), will give you the percentage of the gift taxes paid by the donor, which is added to the recipient’s basis.

Question 11

How do you calculate the basis of an asset acquired by inheritance?

Answer 11

Inherited property will have as its basis the FMV on either:

1. The date of death, or
2. At an alternative valuation date, which is generally 6 months after the date of death.

Question 12

What 2 factors must be in play to allow one to choose the “alternate valuation date” of an inherited property, rather than the Date of Death?

Answer 12

The Alternate Valuation Date can be chosen if it:

1. Decreases the value of the gross estate AND it
2. Decreases the estate tax liability.

Question 13

Who makes the decision on whether the “Date Of Death” or the “Alternative Valuation Date” is used to determine the FMV basis of an estate?

Answer 13

The executor of the estate.

Question 14

If the “Alternate Valuation Date” is chosen by the executor to determine the FMV of an estate, and the distribution of the estate happens before the “Alternate Valuation Date” is reached, then the basis reverts back to the FMV at the Date of Death. True or False?

Answer 14

False.

If the “Alternate Valuation Date” is chosen by the executor to determine the FMV of an estate, and the distribution of the estate happens prior to the “Alternate Valuation Date” is reached, then the basis is determined by the FMV at the date of the distribution of the property.

Question 15

The holding period for Inherited Property is always long-term, no matter when it is received and disposed of by the new owner. True or False?

Answer 15

True.

Inherited Property’s holding period is ALWAYS long-term.

Question 16

An Adjusted basis is used to calculate the gain or loss on the disposal of the property. True or False?

Answer 16

True.

The adjusted basis is the original basis

INCREASED for any
1. Capital Expenditures and

DECREASED for any

1. Depreciation,
2. Amortization or
3. Depletion Charges.

Question 17

If the property appreciates in value over time, the basis is adjusted upwards for this appreciation. True or False?

Answer 17

False.

Appreciation of property is not added to the property’s basis, even over multiple generations.

Question 18

Short-term capital loss reduces the basis of an investment. True or False?

Answer 18

False.

The basis of an investment is not affected by a capital gain loss.

Question 19

Depreciation on a Residential Rental Property begins on the date of purchase. True or False?

Answer 19

False.

A rental property owner can begin to depreciate it only once the house is PLACED IN SERVICE for the production of income. Even if unused, it is in service when it is ready and available for its specific use.

Depreciation ends when either the taxpayer fully recovers the cost, or the property is retired from service, whichever happens first.

Question 20

Basis of an inherited capital asset is always the FMV of the property on the date of death. True or False?

Answer 20

False.

Basis of an inherited capital asset is generally the FMV of the property on the date of death or an alternate valuation date, if elected by the executor.

Question 21

What are the 2 initial things we need to know about an asset

Answer 21

1. What the BASIS of the asset is, and

2. What the HOLDING PERIOD of the asset is.

Question 22

What is the Holding Period for Inherited property?

Answer 22

It is always Long-Term for Inherited Property.

Question 23

What is Adjusted Basis of Property used for?

And what affects its Increase and Decrease?

Answer 23

Adjusted basis is used to calculate the gain or loss on the disposal of a property.

It is increased for any capital expenditures and decreased for any depreciation, amortization or depletion charges.

Question 24

When is Stepped-Up Basis in play.

Answer 24

Stepped-Up Basis is applied to inherited property at the time of the giver’s death.

In this instance, the original Cost basis of the decedent is replaced by the current FMV, reducing the tax liability for the recipient.

Question 25

How to determine the Disposition of a Normal Sale

Answer 25

Gain or loss is the difference between selling price and adjusted basis.

Question 26

Stephen wants to sell his land he is holding for investment. Ann wants to buy it, but can only give him her car as payment. Stephen paid $10,000 for his land and Ann’s car is worth $12,000.

What is Stephen’s Gain or Loss?

Answer 26

If they exchange properties, Stephen will have a $2,000 gain on the sale of his land to Ann.

Question 27

Vladimir has a machine with a $20,000 adjusted basis and the machine also secures a $10,000 debt. Marina wants to buy the machine and offers Vladimir $15,000 cash and she will completely assume his debt.

What is Vladimir’s Gain or Loss?

Answer 27

Vladimir has a $5,000 gain on the sale of his machine because Vladimir received a total of $25,000 of consideration for the machine - $15,000 in cash and $10,000 in the form of the liability that has been assumed by Marina.

Question 28

Installment Sales

Answer 28

When some of the payment for the item is received in the tax year after the sale is made, the installment sale method may be used to calculate the amount of the gain recognized.

Question 29

How to calculate Gross Profit?

Installment Sales

Answer 29

Gross Profit = Sales Price minus Adjusted Basis

Question 30

How to calculate the Gross Profit Percentage?

Installment Sales

Answer 30

Gross Profit Percentage = Gross profit divided by Sales Price.

Question 31

How to calculate Gain Recognized This Year? (Installment Sales)

Answer 31

Gain Recognized This Year = Gross Profit percentage multiplied by Payments Received during the year.

Question 32

Is the Installment Sales method available to Dealers in property?

Answer 32

No. It can not be used for sale of property in the ordinary course of business.

This is for a one-off sale, a side sale.

Question 33

Installment Sales Example

Boris sold some undeveloped land to Alex for $1,000,000 (payable $200,000 per year for 5 years). Boris had an adjusted basis in the land of $400,000.

Normally, Boris would have a $600,000 gain in the year of sale if he had received the $1,000,000 immediately. What would be his annual gain using the Installment Sales method?

Answer 33

Under the installment method, not all of that gain will be recognized in the year of the sale. The gross profit percentage is 60% ($600,000 / $1,000,000) and the gain recognized in the year of sale will be 60% of the cash received. $200,000 was received during the year, so $120,000 will be recognized as taxable income this year.

Question 34

Name the 4 categories of Non-Recognition Transactions.

Answer 34

1. Gifts and inheritances
2. Sale of a residence
3. Exchange of like-kind business or investment properties
4. Involuntary conversions

Question 35

Non-Recognition Transactions - Defined

Answer 35

A nonrecognition transaction is a non-claimable gain or loss, according to the IRS.

It applies as long as a reorganization occurs and property is exchanged solely for stock or securities. When assets are distributed in these scenarios, the gain or loss is a nonrecognition transaction and is not taxed.

Question 36

Non-Recognition Transactions - Gifts and Inheritances

Answer 36

Generally, neither the donor (giver of the gift) nor the testator (the deceased) will recognize gain/loss in this transaction.

Question 37

Non-Recognition Transactions - Sale of Residence

Answer 37

If a single taxpayer sells a home they have occupied as their principal residence for at least 2 of the 5 years preceding the sale, they may exclude $250,000 of the gain on the sale of the residence from their income.

Married taxpayers may exclude $500,000 in this situation.

Question 38

Non-Recognition Transactions - Exchange of Like-Kind Property

Answer 38

If the properties in an exchange are like-kind real property and held either for

1. productive use in a trade or business, or
2. for investment,

no gain or loss will be recognized on the transaction by either party.

Question 39

Non-Recognition Transactions - Exchange of Like-Kind Property with BOOT in the exchange

Answer 39

If boot is received as part of like-kind exchange, some gain will recognized by the recipient of the boot.

The Recognized Gain is the lesser of:

1. Realized gain, or
2. Amount of boot received.

A loss is never realized in a like-kind exchange.

Question 40

Boot - Defined

Answer 40

Boot is cash, other property, or the assumption of liabilities that belonged to the other party.

Anything that is included other than the like-kind properties, is boot.

Question 41

How do you calculate the Basis of New Like-Kind Asset?

Answer 41

Basis of the old property exchanged
\+	Basis of any boot given
\+	Gain recognized
−	Fair market value of any boot received
=	Basis in the newly acquired property.

The basis of the boot received will be its fair market value.

Question 42

Like-Kind Exchange - Realized Gain Example:

Roger had some land with an adjusted basis of $3,000 and a fair market value of $11,000 and some stock with an adjusted basis of $6,000 and a fair market value of $2,000. He exchanged these assets with Walter for some other land worth $12,000. Walter’s basis in his land was $4,000.

1. What is Walter’s realized gain?
2. What is Walter’s recognized gain?
3. What is Walter’s Basis in the newly acquired property?

Answer 42

Walter has a realized gain of $9,000 (the fair market value of the land received $11,000 + fair market value of stock received $2,000 – basis of his land $4,000).

Since he received Boot, he must recognize gain.

The gain is the lesser of the gain realized or the boot received. Since the boot was the lesser, Walter’s recognized gain is $2000.

Basis is found by
Basis of the old property exchanged $4,000
+ Basis of any boot given $0
+ Gain recognized $2,000
− Fair market value of any boot received ($2,000)
= Basis in the newly acquired property is $4000

Question 43

Like-Kind Exchange - Realized Gain Example:

A building held by John for investment with a basis of $100,000 was exchanged for other investment real estate with a fair market value of $90,000, and a snowmobile with a fair market value of $20,000 and $15,000 in cash.

1. What is John’s realized gain?
2. What is John’s recognized gain?
3. What is John’s Basis in the newly acquired property?

Answer 43

John’s realized gain is $25,000.

The recognized gain is limited to only $25,000 because the recognized gain may not exceed the realized gain.

The new basis is calculated:
Basis of the old property exchanged $100,000
+ Basis of any boot given 0
+ Gain recognized 25,000
− Fair market value of any boot received (35,000)
= Basis in the newly acquired property

Question 44

Define Involuntary Conversions - (A conversion not at the choice of the owner, ie. fire, theft, etc)

Answer 44

The general rule is that if the property which is involuntarily converted is replaced

1. With property of similar or related use
2. By the end of the second tax year after the tax year in which the gain is first realized,

the taxpayer may elect not to recognize the gain on the disposal of the property.

Question 45

When do you Recognize Gain on Involuntary Conversion?

Answer 45

Gain is recognized only to the extent that all of the proceeds are not used to buy qualified replacement property.

Therefore, missing the replacement period (2 or 3 years) or not replacing with property of similar or related use property will make the involuntary conversion taxable.

Question 46

Basis of Replacement Property

Answer 46

Cost of the new replacement property
− Any gain not recognized on the disposal
= Basis of the Replacement Property

(Gain is simply being deferred to future periods)

Question 47

Special Disaster Relief Rules for major natural disaster weather events impacting many people.

Answer 47

1. May exclude from taxable gain any insurance proceeds received for unscheduled personal property
2. Can elect for insurance proceeds for a home and/or its contents to be treated as one item.
3. Have a 4-year period in which to replace the assets. This 4-year period starts at the end of the tax year in which the gain is realized.

Question 48

Special Disaster Relief Rules - Current Modification

Answer 48

A personal casualty loss must be attributable to a disaster declared by the President.

An exception applies to the extent a loss of an individual does not exceed the individual’s personal casualty gains.

Question 49

Special Disaster Relief Rules - Example:

Dima had some land with a basis of $30,000. This land was condemned (seized) by the state. The state paid him $35,000 for the land, which gives him a $5,000 gain on the event. Dave reinvested $32,000 in similar use property.

1. What Dima’s recognized gain, if any?
2. What is the basis for Dima’s replacement property?

Answer 49

Because not all of the money was reinvested in the replacement property, Dima must recognize $3,000 of gain for tax purposes.

Dima’s basis in the new land will be $30,000. This is the $32,000 he paid for it minus the $2,000 of gain that was not taxed.

Question 50

With the Sale of Property, what 3 things need to be determined?

Answer 50

1. The character of the gain or loss
2. The amount of the gain or loss
3. The tax treatment of the gain or loss

Question 51

What’s a simpler way to say the “Disposition of Capital Assets?”

Answer 51

The SALE of Capital Assets

Question 52

Disposition (Sale) - what 3 “amounts” need to be found.

Answer 52

1. Amount Realized - everything (money, services, etc) received by the seller for the property.
2. Realized Gain (or Loss) - the difference between the adjusted basis of the property and the amount realized in the transaction
3. Recognized Gain (or Loss) - The amount (gain or loss) that’s recognized for tax purposes.

Question 53

Capital Assets Classification

Answer 53

Capital Assets Classification:
Capital assets include all investment property and property held for personal use (aka significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art), EXCEPT for the following:

1. Inventory
2. Depreciable or real property used in a trade or business
3. Copyrights or artistic, literary, etc. compositions created by or for the taxpayer
4. Accounts or notes receivable from normal business activities
5. Supplies used in a business
6. U.S. Government publications acquired for free

Question 54

Specific Capital Assets (List)

Answer 54

All investment property.

1. Real estate
2. Stocks or bonds held as investment

Property held for personal use.

1. Personal vehicles (cars)
2. Personal home and household furnishings
3. Electronics
4. Coin or stamp collections
5. Gems and jewelry

Question 55

What is the Holding Period for Capital Assets?

Answer 55

The holding period determines whether the item is a short-term or long-term capital gain or loss.

More than one year is long-term holding. (366 days or more)

Short-term capital gains are taxed like ordinary income.

Question 56

Rules for Netting Short-Term and Long-Term Capital Assets

Answer 56

All gains and losses are net together within short-term and long-term.

If both are gains or losses, they are treated as their time period of holding.

If they are different, they are net together and are treated as the time period of the larger amount.

Question 57

Individuals – Net Capital Gains

Answer 57

Long-term capital gains are generally taxed at a maximum rate of 20%.

Net Short-term capital gains are taxed at the ordinary tax rate.

Question 58

Individuals – Net Capital Losses

Answer 58

Can deduct $3,000 of net capital loss per year ($1,500 if MFS), OR

Taxable income before capital loss that year from their income.

Individuals cannot carry capital losses back to prior years to obtain benefit, but can carry capital losses forward indefinitely to be utilized against future income.

Question 59

Corporate Capital Gains/Losses

Answer 59

Corporations do not receive a reduced tax rate for capital gains compared to ordinary income.

Corporations can deduct capital losses only to the extent of capital gains.

Corporations may carry a net capital loss back three years and forward five.

Question 60

Sale of Business, Tangible Personal, and Real Property

Answer 60

This is Section 1231 Property, which is land or depreciable property that is used in a trade or business held for more than 1 year.

Not capital assets, but may give rise to gains or losses that are treated as capital gain or loss.

If §1231 losses exceed the gains, then the net losses are treated as ordinary losses.

If §1231 is a net capital gain, some of the capital gain may have to be recaptured (reclassified) as ordinary income.

Question 61

Gain Reclassification

Answer 61

§1245 Property is primarily depreciable personal property.
All depreciation claimed prior to the sale, must be recaptured as ordinary gain when the item is sold.

§1250 Property is depreciable real property.
A 25% rate applies to the gain up to the amount of straight-line depreciation, any excess gain due to additional depreciation is recaptured as ordinary gain.

Question 62

What is the Result of Recapture for Corporate Taxes?

Answer 62

The company will have a capital gain that is equal to the amount of increase in the value of the asset while they held it.

NOTE: Depreciation decreases the original basis, so the gain on the sale will be taxed as ordinary income.

Question 63

Example 01 of Gain/Loss:
Assume a company owns Section 1245 property that cost $500 and has $310 of accumulated depreciation. The adjusted basis of the property is $190.

If the property is sold for $600, what are the gains and losses?

Answer 63

The total realized gain is $410.

The amount of depreciation that has been recognized will be treated as ordinary income ($310), and the remaining gain of $100 will be treated as a Section 1231 (capital) gain. This is the amount of the appreciation in the value of the property while held by the company.

Question 64

Example 02 of Gain/Loss:
Assume a company owns Section 1245 property that cost $500 and has $310 of accumulated depreciation. The adjusted basis of the property is $190.

If the property is sold for $400, what are the gains and losses?

Answer 64

In this case the total realized gain is $210 and the entire amount will be recaptured and treated as ordinary income (the entire amount of the gain is due to depreciation – there has been no appreciation in the value of the asset above its purchase price).

Question 65

Sale of Securities

Answer 65

The gain or loss on the sale of a security is a taxable or tax deductible event.

Question 66

What are the 5 situations in respect to Security transactions?

Answer 66

1. Wash sales
2. Shares received in a stock dividend
3. Shares received in a stock splits
4. Worthless stock
5. Small business stock

Question 67

Wash Sales

Answer 67

Substantially the same stock is purchased within 30 days of the sale.

Note: The loss from the wash sale is NOT tax deductible. When a loss is disallowed, the basis of the new stock is the same as the basis of the old stock.

Question 68

Stock Dividends Received

Answer 68

Stock dividends received are NOT taxable.

Note: If there was an option to receive a cash dividend or a shares dividend and the shares are selected, the shares will be taxable at their fair market value.

However, because you own more shares, the basis in the shares is decreased.

Question 69

Stock Dividend Received Basis Adjustment Example:

Answer 69

Jones purchases 100 shares of ABC Corp. for $5,000 on January 1. The basis for each share is $50. On July 18, ABC Corp. announces a 20% stock dividend.

As a result of the stock dividend, Jones will own 120 shares. The $5,000 purchase price needs to be allocated to all of the ABC shares.

The basis for the 120 shares is now $41.67 for each of the 120 shares.

On October 12, Jones sells 50 shares for $3,000.

The gain for Jones is $917 (calculated as $3,000 - $2,083 basis).

Question 70

Stock Splits

Answer 70

The stock split itself is not taxable but it does lower the taxpayer’s basis in the shares that they previously held.

Question 71

Worthless Stock

Answer 71

When stock becomes completely worthless the basis of the stock is deductible as a capital loss.

NOTE: An exception is that if the stock is a small business investment company, known as §1244 stock; then the loss is an ordinary loss deductible in Form 4797-Sales of Business Property.

This is applicable ONLY for the person who originally acquired the shares from the company that issued the shares.

Question 72

Small-Business Stock

Answer 72

Section 1202 allows a noncorporate taxpayer who holds small-business stock for at least 5 years to normally exclude at least 50% of the gain from the sale of the stock from taxable income.

A higher exclusion is allowed for stock purchased After February 9, 2009.

If stock was purchased between February 18, 2009 and September 26, 2010, the exclusion of gain from the sale is increased to 75%.

The exclusion of gain from the sale is increased to 100% for stock acquired after September 27, 2010.

Question 73

Do points paid to the bank to lower a mortgage rate, qualify toward a property’s basis?

Yes or no?

Answer 73

No.

Question 74

Do escrowed taxes qualify toward a property’s basis?

Yes or no?

Answer 74

No. Amounts paid in escrow go toward future payments, so it is not added to basis.

Question 75

In 2019, Michael was given a gift of a rare painting of a duck holding a shotgun. His father, Kirk, gave it to him. This gift of the property has a fair market value (FMV) of $60,000. Kirk’s adjusted basis was $20,000. The gift tax paid was $10,000. What is Michael’s basis in the property?

Answer 75

$28,889

$10,000 x [($60,000-$20,000) / ($60,000-$15,000)] = $8,889 net increase in value of gift.

Gift tax paid x [FMV at time of gift - donor’s basis) / (amount of gift - 2019 annual exclusion)]

NOTE: only a PORTION of the gift tax is added to basis.

Note: you don’t need to do this calculation on the test. Just know the rule is that a portion of the gift tax is added and then pick the best answer of the multiple choices.

Question 76

You can add the total gift tax to the Cost Basis of a gift. True or False?

Answer 76

False.

Only a portion of the Gift Tax is able to be added.

Question 77

Jerry received 7 acres of land valued at $30,000 as a gift from Dean. Dean’s adjusted basis was $32,000. Jerry subsequently sold the land for $20,000, which didn’t make Dean happy. For purposes of reporting the transaction, what is Jerry’s basis in the land?

Answer 77

$30,000

Basis for Gain: $32,000
Basis for Loss: $30,000

Question 78

Dual Basis

Answer 78

TBD

Question 79

RE: Dual Basis)
You received an acre of land as a gift. At the time of the gift, the land had a FMV of $8,000. The donor’s adjusted basis was $10,000. After you received the land, no events occurred to increase or decrease your basis. You sell the land for $9,000. What is the amount of gain or loss you must report?

Answer 79

$0

Gain - use donor’s basis
$9,000 sale -$10,000 basis = ($1,000) loss

Loss - use FMV on the date of gift
$9,000 sale - $8,000 FMV = $1,000 gain

IF a loss creates a gain, AND a gain creates a loss, then you have neither, and call it $0.00

Question 80

What are examples of Involuntary Conversions?

And how is the Basis of the replacement property calculated?

Answer 80

1. Condemned
2. Destroyed
3. Theft
4. Imminent Domain

The Basis of replacement property is based on the converted property.

Question 81

Amy owned a large building with a tax basis of $600,000 and an estimated FMV of $720,000. The property was condemned by the state to make way for a new highway. Amy was paid the FMV for the property and quickly used $700,000 of this money to buy qualified replacement property. The other $20,000 was invested in State of Idaho bonds.

1. What gain, if any should Amy recognize on this condemnation of this building?
2. What is Amy’s basis in the new building?

Answer 81

1. $20,000 - not spent on replacement property
2. $600,000 - same as condemned property.

The basis is the same
as the condemned building because it preserves the gain Amy had before the condemnation, and allows recognizing the gain to be deferred.

Question 82

Stock Splits

Answer 82

2:1 (2 for 1) - Doubles your total.

Applied to each tax lot.

Question 83

Juan purchase 2 shares of common stock in 20X1 in a company that markets biotech products. Juan paid $90 for one share and $110 for the next share. Later that year, the company declared a 2 for 1 common stock split. What is Juan’s new basis for the shares?

Answer 83

Two shares at $45/share and two shares at $55/share

$90/2 = $45
$110/2 = $55

Question 84

Installment Sales

Answer 84

Paid in installments over time.

Interest
Return of Basis
Gain

Found by the Gross Profit Percentage.

(Q&A Not complete)

Question 85

How is Gross Profit calculated?

RE: Installment Sales

Answer 85

Selling Price - Adjusted Basis = Gross Profit

$100,000-$40,000=$60,000

Question 86

How is Gross Profit Percentage calculated?

RE: Installment Sales

Answer 86

Gross Profit / Sales Price =
Gross Profit Percentage

$60,000 / $100,000 = 60% GPP

Question 87

What is the maximum amount (Limitation) of gain a taxpayer can realize in a repossessed property?

Answer 87

Gross Profit - Recognized gain - Repossession Costs = Limitation.

Question 88

Installment Notes

Answer 88

Questions needed!

Question 89

What is the Amount Realized for a sold property?

Answer 89

Everything received for the property. (money, FMV of property or services, and debt or other liabilities assumed by buyer)

Question 90

Realized gain/loss

Answer 90

The Difference between adjusted basis and the amount realized in a sale

Question 91

Amount Recognized

Answer 91

Amount included in taxable income for the tax year.

Question 92

Maggie had the following transactions during 20X1:

• $36,000 short-term capital loss
• $15,000 long-term capital loss
• $25,000 short-term capital gain
• $22,000 long-term capital gain

1. What is the net capital gain/loss for Maggie in 20X1?
2. What is the impact on Maggie’s 20X1 taxable income?

Answer 92

1. ($4,000) short term capital loss
   - $25,000 STCG - $36,000 STCL = ($11,000) STCL
   - $22,000 LTCG - $15,000 LTCL = $7,000 LTCG
   - ($11,000) + $7,000 = ($4,000) STCL
2. $3,000 deductible against ordinary income; $1,000 carryforward.

Question 93

You used a building in your business that cost you $70,000. You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. You sold the building for $100,000 plus property having a fair marklet value of $20,000. The buyer assumed your real estate taxes on $3,000 and a mortgage of $17,000 on the building. The selling expenses were $4,000. Using only the details provided:

1. What is the Amount Realized on this transaction?
2. What is the recognized gain on this transaction?

Answer 93

Amount Realized from sale is $136,000 ($100,000+$20,000+$3,000+$17,000-$4,000)

Adjusted basis of property is $80,000 ($70,000+$20,000-$10,000)

Recognized Gain is $56,000 ($136,000-$80,000)

Question 94

You sold a residential lot 2 years ago and reported the $20,000 capital gain on the installment method. In the third year of payments the buyer defaulted and you had to repossess the lot. In the first year you reported a gain of $4,000 ($10,000x40%) and $2,400 ($6,000x40%) in the second year. No payments were received in the third year and you spent $2,500 in legal fees to repossess the property. What is the taxable gain you must report on the repossession?

Answer 94

$16,000 total received - $6,400 already recognized = $9,600

Gain Limitation to $11,000
which is the $20,000 gross profit - $6,400 recognized - $2,500 repossession costs

Question 95

The owner of unimproved land with a basis of $40,000 sold the property for $100,000. The seller accepted a note for the entire $100,000 sales price. In a later year, when the buyer still owed $10,000, the note was sold for $9,000 cash.

How much capital gain (loss) is recognized on the sale?

Answer 95

$5,000 Capital Gain

60% Gross Profit Percentage ($60,000 / $100,000)

$10,000X60% = $6,000 profit; $4,000 basis
$9,000-$4,000 = $5,000

Question 96

How to determine the Basis of Gifted Property?

Answer 96

If the FMV is equal to or greater than the donor’s adjusted basis, then the Basis is the same as the Donor’s adjusted basis (plus any gift tax paid).

If the FMV is less than the Donor’s adjusted basis,
if a Gain, then basis is the same as the Donor’s adjusted basis.
If a Loss, then the basis is the FMV when the taxpayer received the gift.

Question 97

Ed purchased a house on an acre of land from Ruth on June 30. Prior to the pruchase, Ed had been renting the house from Ruth for $500 per month. Ed paid the following amounts:

$100,000 in loan proceeds to Ruth
$2,000 in points to the bank
$1,000 in real estate taxes Ruth owed to the town
$1,000 in past due rent to Ruth
$1,000 in closing costs to the bank for legal, recording, title insurance and survey fees
$1,000 in escrowed real estate taxes to the bank

What is Ed’s basis in the house and land purchased from Ruth?

Answer 97

$102,000

$100,000 + $1,000 (taxes Ruth owed) + $1,000 (closing costs)