Question 1

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

A net Sec.1231 gain is subject to a special tax treatment that may result in capital gain or ordinary income treatment depending on certain conditions. If a taxpayer has any nonrecaptured net Sec.1231 losses for the preceding five years, the net Sec.1231 gain is treated as ordinary income to the extent of those losses.

Question 2

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

Accepted Answer

Sec.1231 property is defined as property used in a trade or business and held for more than one year. Therefore, it must satisfy a holding period of more than one year.

Question 3

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

Accepted Answer

False

Question 4

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 5

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 treated as ordinary income and deductions, not as capital gains and losses, so they cannot be used to offset or create net capital gains or losses. Therefore, Mark cannot report a net capital loss of $2,000, and instead would report his Section 1231 gains and losses separately.

Question 6

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

This is generally true under the tax code. Depreciable assets held for more than one year are subject to different rules and may be taxed at a different rate.

Question 7

Jillian,whose tax rate is 39.6%,had the following sales of Section 1231 property this year:
Sale of land at a gain of $15,000
Sale of land at a gain of $12,000
Sale of land 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

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 9

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

To calculate the tax resulting from these transactions, we need to follow the steps below:

1. Calculate the net Section 1231 gain or loss for the current year:
   Net Section 1231 gain = $40,000 - $22,000 = $18,000

2. Determine the character of the net Section 1231 gain or loss:
   Since the net Section 1231 gain is positive, it is treated as long-term capital gain.

3. Calculate the tax on the net Section 1231 gain or loss:
   For long-term capital gains, taxpayers in the 28% marginal tax bracket will have a tax rate of 15%. Therefore, the tax on the net Section 1231 gain is:
   Tax on net Section 1231 gain = $18,000 x 15% = $2,700

Therefore, the correct answer is A) $2,700.

Question 10

In 2015,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

According to the information given, Thomas has no nonrecaptured 1231 gain and no other 1231 transactions or capital asset transactions, which means the $4,000 gain from the sale of the Sec.1231 property will be treated as a long-term capital gain. Long-term capital gains are subject to a lower tax rate than ordinary income, and since Thomas's marginal tax rate is 15%, he will pay no tax on the $4,000 gain.

Question 11

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

The answer of During the current year,George recognizes a $30,000...

Question 12

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

According to the tax code, Sec.1231 gains are treated as ordinary income until the losses are netted against them. Therefore, the $25,000 net Sec.1231 gain will be included in ordinary income.

However, the $18,000 loss on the sale of stock will be treated as a capital loss. Since the loss is more than the gains, Aamir will have a net capital loss of $18,000 - $3,000 (the maximum allowable capital loss deduction) = $15,000.

Therefore, the net capital gain that will be included in Aamir's AGI is $7,000 ($25,000 - $18,000).

Question 13

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 AGI would be $50,000 + ($12,000 - $16,000) = $46,000.

Question 14

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 15

Lucy,a noncorporate taxpayer,experienced the following Section 1231 gains and losses during the years 2010 through 2015.Her first disposition of a Sec.1231 asset occurred in 2010.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 16

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 to help business owners replace assets which had declined in value.

Question 17

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

Since Yelenis has a prior Sec.1231 loss, the gain from the current sale can be used to offset the prior loss, resulting in a net Sec.1231 gain of $36,000 ($50,000 gain minus $14,000 loss). Of this amount, $30,000 is unrecaptured Sec.1250 gain, which will be taxed at a maximum rate of 25%. The remaining $6,000 will be treated as long-term capital gain and taxed at a rate of 15%, resulting in a total tax liability of $8,700 [$30,000 x 25% + $6,000 x 15%]. Therefore, the answer is B.

Question 18

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 Sec.1231 property, and since the gains are from the sale of business assets, they are considered to be long-term capital gains. As Blair had no other Sec.1231 transactions, the gains are netted together, resulting in a net capital gain of $40,000. Since Blair's tax rate is 28%, the net capital gain will be taxed at a rate of 15%. Therefore, the correct answer is C, a net capital gain of $40,000 taxed at 15%.

Question 19

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

The answer of Daniel recognizes $35,000 of Sec.1231 gains and...

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

The answer of During the current year,Danika recognizes a $30,000...

Quiz 26: Property Transactions: Section 1231 and Recapture

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.

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

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

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

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.

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.

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

In 2015,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.

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

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

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?

Why did Congress establish favorable treatment for 1231 assets?

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?

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

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)