Question 1

Depreciable property used in a trade or business for one year or less is considered Sec.1231 property.

Accepted Answer

Sec. 1231 property generally refers to depreciable property used in a trade or business for more than one year.

Question 2

A net Sec.1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec.1231 losses for the preceding five years.

Accepted Answer

This is true. If a taxpayer has a net Sec.1231 gain, it will be treated as ordinary income to the extent of any nonrecaptured net Sec.1231 losses incurred in the previous five years.

Question 3

During the current year,George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land.Prior to this,George's only Section 1231 item was a $14,000 loss six years ago.George must report a
A)$12,000 net LTCG.
B)$12,000 ordinary income.
C)$14,000 ordinary income.
D)$10,000 ordinary income and $2,000 net LTCG.

Accepted Answer

George has a net Section 1231 gain of $12,000 ($30,000 gain - $18,000 loss). Since the previous Section 1231 loss occurred more than five years ago, it does not affect the current year's gain, allowing the $12,000 to be treated as a long-term capital gain.

Question 4

Blair,whose tax rate is 28%,sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000.Both tracts of land are Sec.1231 property.She has never had any other Sec.1231 transactions.How are the gains taxed?
A)ordinary income of $40,000 taxed at 28%
B)a net capital gain of $40,000 which is not taxed
C)a net capital gain of $40,000 taxed at 15%
D)ordinary income of $40,000 taxed at 25%

Accepted Answer

Both tracts of land are classified as Sec.1231 property, which means they are subject to both ordinary income tax rates and capital gains tax rates. However, if the net result of all Sec.1231 transactions in a given year is a gain, then those gains are taxed at the more favorable long-term capital gains rate. In this case, Blair's gains from the two tracts of land total $40,000. Since this is a net gain and Blair has no other Sec.1231 transactions for the year, the entire amount is taxed at the long-term capital gains rate of 15%. Therefore, choice C is the correct answer.

Question 5

In 2016,Thomas,who has a marginal tax rate of 15%,sells land that is Sec.1231 property at a gain of $4,000.If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain,Thomas will pay no tax on the $4,000 gain.

Accepted Answer

The gain from the sale of Sec.1231 property is not taxable if the taxpayer has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain.

Question 6

Lucy,a noncorporate taxpayer,experienced the following Section 1231 gains and losses during the years 2011 through 2016.Her first disposition of a Sec.1231 asset occurred in 2011.Assuming Lucy had no capital gains and losses during that time period,what is the tax treatment in each of the years listed?

Accepted Answer

The answer of Lucy,a noncorporate taxpayer,experienced the following Section 1231...

Question 7

Jillian,whose tax rate is 39.6%,had the following sales of Section 1231 property this year:
Sale of land A at a gain of $15,000
Sale of land B at a gain of $12,000
Sale of land C at a loss of $8,000
a.What is the amount of her resulting tax liability?
b.Assume instead that Jillian has a 15% marginal tax rate.What is the amount of her resulting tax liability?
c.Assume instead that Jillian has a 28% marginal tax rate.What is the amount of her resulting tax liability?

Accepted Answer

The answer of Jillian,whose tax rate is 39.6%,had the following...

Question 8

During the current year,Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land.Prior to this,Kayla's only Section 1231 item was a $10,000 loss six years ago.Kayla is in the 28% marginal tax bracket.The amount of tax resulting from these transactions is
A)$2,700.
B)$3,600.
C)$4,000.
D)$5,040.

Accepted Answer

Kayla's net Section 1231 gain is $18,000 ($40,000 gain - $22,000 loss). Since she had a Section 1231 loss six years ago, the gain is treated as ordinary income under the recapture rule. The tax on $18,000 at a 28% rate is $5,040. However, the question asks for the tax resulting from these transactions, which is the tax on the net gain after considering the recapture, leading to $2,700 ($18,000 - $10,000 recaptured = $8,000 taxed at 28%).

Question 9

Sec.1231 property must satisfy a holding period of more than one year.

Accepted Answer

Sec.1231 property must be held for more than one year to qualify for long-term capital gains treatment.

Question 10

Yelenis,whose tax rate is 28%,sells one Sec.1231 asset this year,resulting in a $50,000 gain.Included in the $50,000 Sec.1231 gain is $30,000 of unrecaptured Sec.1250 gain.A review of Yelenis tax files for the past five years indicates one prior Sec.1231 sale which resulted in a $14,000 loss.The gain will be taxed as
A) 
B) 
C) 
D)

Accepted Answer

Yelenis has a net Sec.1231 gain of $16,000 ($50,000 gain - $30,000 unrecaptured Sec.1250 gain - $14,000 prior Sec.1231 loss). Since this is a net Sec.1231 gain, it is taxed at the lower capital gains rate, which for Yelenis is 15%. However, 5% of the $30,000 unrecaptured Sec.1250 gain is taxed at Yelenis's ordinary income tax rate of 28%, resulting in an additional tax of $1,500 ($30,000 x 0.05 x 0.28). Therefore, the total tax on the Sec.1231 gain is $3,300 ($15,000 x 0.15 + $1,500).

Choice B is the correct answer because it correctly applies the rules for taxing Sec.1231 gains and unrecaptured Sec.1250 gain.

Question 11

Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses.The gains and losses are characterized as
A) 
B) 
C) 
D)

Accepted Answer

The answer of Jeremy has $18,000 of Section 1231 gains...

Question 12

Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Accepted Answer

According to IRS guidelines, any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Question 13

Why did Congress establish favorable treatment for 1231 assets?
A)to encourage the mobility of capital
B)to allow a larger deduction for losses
C)to help business owners replace assets which had declined in value
D)All of the above

Accepted Answer

Congress established favorable treatment for 1231 assets to encourage the mobility of capital, allow a larger deduction for losses, and help business owners replace assets which had declined in value.

Question 14

Jaiyoun sells Sec.1231 property this year,resulting in a $4,000 gain.This is the first time he has disposed of any Sec.1231 property.Jaiyoun's tax rate is 10%.His tax on the Sec.1231 gain will be
A)$0.
B)$400.
C)$600.
D)$1,120.

Accepted Answer

The answer of Jaiyoun sells Sec.1231 property this year,resulting in...

Question 15

Hilton,a single taxpayer in the 28% marginal tax bracket,has $16,000 of nonrecaptured net Sec.1231 losses,at the beginning of a year in which he had the following transactions:
-Sale of Asset A at a $10,000 1231 gain,all of which is unrecaptured Sec.1250 gain
-Sale of Asset B at a $13,000 1231 gain
How are the items reported this year and at which rate(s)are the amounts taxed?

Accepted Answer

The answer of Hilton,a single taxpayer in the 28% marginal...

Question 16

Aamir has $25,000 of net Sec.1231 gains this year on business assets.In addition,incurred $18,000 of loss on the sale of stock held six months.Aamir will include in his AGI
A)$3,000 short term capital loss and $25,000 ordinary gain.
B)$22,000 net capital gain.
C)$7,000 net capital gain.
D)$7,000 short-term capital gain.

Accepted Answer

Aamir has $25,000 of net Sec.1231 gains, which are treated as long-term capital gains when calculating net capital gains. However, he also incurred a $18,000 short-term capital loss on the sale of stock held for less than one year. As per IRS rules, the net capital gains are calculated by subtracting short-term capital losses from long-term capital gains, which would be $25,000 - $18,000 = $7,000. Therefore, the correct answer is option C) $7,000 net capital gain.

Question 17

Daniel recognizes $35,000 of Sec.1231 gains and $25,000 of Sec.1231 losses during the current year.The only other Sec.1231 item was a $4,000 loss three years ago.This year,Daniel must report
A) 
B) 
C) 
D)

Accepted Answer

Daniel has a net Sec.1231 loss of $10,000 ($35,000 - $25,000) for the current year. This loss can be used to offset gains from other sources or carried back 3 years and forward 5 years to offset Sec. 1231 gains. However, since the only other Sec. 1231 item was a $4,000 loss from three years ago, Daniel cannot carryback any of the current year's loss. Therefore, the net Sec. 1231 loss of $10,000 can only be carried forward for up to 5 years and used to offset future Sec. 1231 gains. The correct answer is therefore B, which is the only choice that reflects this outcome.

Question 18

Pierce has a $16,000 Section 1231 loss,a $12,000 Section 1231 gain,and a salary of $50,000.What is the treatment of these items in Pierce's AGI?
A)Pierce has a LTCG of $12,000 and a net ordinary income of $34,000.
B)The 1231 gains and losses are treated as ordinary gains and losses making Pierce's AGI for the year $46,000.
C)Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000.He also has a $1,000 LTCL carryover.
D)Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.

Accepted Answer

Section 1231 gains and losses are treated as ordinary gains and losses, so Pierce's Section 1231 loss and gain offset each other to result in $0. Pierce's AGI would be his salary of $50,000 plus $0 from Section 1231 gains and losses, for a total AGI of $50,000. None of the other choices accurately reflect Pierce's situation. Choice A incorrectly assumes that Pierce has a net long-term capital gain, and choice C incorrectly assumes that Pierce has a long-term capital loss carryover. Choice D incorrectly assumes that Pierce has a net long-term capital gain and a high amount of net ordinary income.

Question 19

Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses.He must report a net capital loss of $2,000 on his tax return.

Accepted Answer

Section 1231 gains and losses are reported as ordinary income or loss, not as capital gains or losses. Therefore, they do not impact net capital gains or losses. Mark would report his net Section 1231 loss of $2,000 on his tax return as ordinary loss.

Question 20

During the current year,Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss.Prior to this,Danika's only Section 1231 item was a $15,000 loss two years ago.Danika must report a(n)
A)$8,000 net LTCG.
B)$8,000 ordinary income.
C)$15,000 ordinary income.
D)$8,000 ordinary income and $7,000 net LTCG.

Accepted Answer

Danika has a net Section 1231 gain of $8,000 ($30,000 gain - $22,000 loss). However, due to the $15,000 Section 1231 loss from two years ago, the $8,000 gain is recaptured as ordinary income under the Section 1231 lookback rule.

Quiz 13: Property Transactions: Section 1231 and Recapture

Depreciable property used in a trade or business for one year or less is considered Sec.1231 property.

A net Sec.1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec.1231 losses for the preceding five years.

During the current year,George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land.Prior to this,George's only Section 1231 item was a $14,000 loss six years ago.George must report a

Blair,whose tax rate is 28%,sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000.Both tracts of land are Sec.1231 property.She has never had any other Sec.1231 transactions.How are the gains taxed?

In 2016,Thomas,who has a marginal tax rate of 15%,sells land that is Sec.1231 property at a gain of $4,000.If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain,Thomas will pay no tax on the $4,000 gain.

Sec.1231 property must satisfy a holding period of more than one year.

Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses.The gains and losses are characterized as

Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

Why did Congress establish favorable treatment for 1231 assets?

Jaiyoun sells Sec.1231 property this year,resulting in a $4,000 gain.This is the first time he has disposed of any Sec.1231 property.Jaiyoun's tax rate is 10%.His tax on the Sec.1231 gain will be

Aamir has $25,000 of net Sec.1231 gains this year on business assets.In addition,incurred $18,000 of loss on the sale of stock held six months.Aamir will include in his AGI

Daniel recognizes $35,000 of Sec.1231 gains and $25,000 of Sec.1231 losses during the current year.The only other Sec.1231 item was a $4,000 loss three years ago.This year,Daniel must report

Pierce has a $16,000 Section 1231 loss,a $12,000 Section 1231 gain,and a salary of $50,000.What is the treatment of these items in Pierce's AGI?

Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses.He must report a net capital loss of $2,000 on his tax return.

During the current year,Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss.Prior to this,Danika's only Section 1231 item was a $15,000 loss two years ago.Danika must report a(n)