Question 1

Installment sales of depreciable property which result in recaptured income under Secs.1245 or 1250 require that the recaptured income be recognized in the year of sale.

Accepted Answer

This is because the recapture rules apply to the portion of the gain that is attributable to depreciation, and since depreciation is taken over the life of the asset, the recapture must be recognized in the year of sale, even if the sale is on an installment basis.

Question 2

Frisco Inc.,a C corporation,placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner.It sold the building this year for a substantial gain.Because straight-line depreciation was used,Frisco will not need to recognize any ordinary gain.

Accepted Answer

While Frisco will not need to recognize any ordinary gain, it will still need to recognize a portion of the gain as recaptured depreciation, which is taxed at a higher rate than ordinary income.

Question 3

Gifts of appreciated depreciable property may trigger recapture of depreciation of cost-recovery deductions to the donor as of the date of gift.

Accepted Answer

The answer of Gifts of appreciated depreciable property may trigger...

Question 4

Maura makes a gift of a van to a local food bank run by a charity.Maura had used the van in her trade or business.The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed.What is the amount of Maura's charitable contribution deduction?
A)$6,500
B)$31,000
C)$4,000
D)$2,500

Accepted Answer

Maura's charitable contribution deduction is based on the fair market value of the van at the time of the donation, which is $6,500. However, since she used the van in her trade or business, she must reduce her deduction by the total amount of depreciation claimed on the vehicle, which is $27,000. Therefore, her charitable contribution deduction is $6,500 - $27,000 = -$20,500. However, since the deduction cannot be negative, it is limited to zero. The excess ($4,000) can be carried forward as a charitable contribution deduction in future years.

Question 5

Describe the tax treatment for a noncorporate taxpayer in the 39.6% marginal tax bracket who sells each of the first two assets for $500,000 and each of the second two assets for $750,000.Each asset was purchased in 2011 and is used in a trade or business.There are no other gains and losses and no nonrecaptured Section 1231 losses.

Accepted Answer

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Question 6

A taxpayer purchased a factory building in 1985 for $800,000.After claiming ACRS-accelerated depreciation of $800,000,she sells the asset for $1,000,000 during the current year.No payment is received during the current year,and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale.The installment sales method is adopted.How much ordinary income is recognized in the current year?
A)$ 0
B)$200,000
C)$800,000
D)$1,000,000

Accepted Answer

Since the taxpayer claimed accelerated depreciation equal to the cost basis of the asset, the entire proceeds from the sale are subject to recapture as ordinary income. Therefore, the ordinary income recognized in the current year is equal to the amount of accelerated depreciation claimed, which is $800,000. This amount will be reported on the taxpayer's tax return in the year of sale, even though the payments from the buyer will be received over the next four years.

Question 7

When a donee disposes of appreciated gift property,the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

Accepted Answer

The answer of When a donee disposes of appreciated gift...

Question 8

Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec.179.Depreciation of $3,500 would have been taken under the MACRS rules.If Douglas converts the furniture to nonbusiness use today,Douglas must
A)amend the prior two years tax returns.
B)include $3,500 in gross income in year of conversion.
C)include $21,500 in gross income in year of conversion.
D)include $25,000 in gross income in year of conversion.

Accepted Answer

When converting property from business use to personal use, the taxpayer must recognize any remaining basis as taxable income in the year of the conversion. In this case, the remaining basis after expensing under Sec. 179 is $21,500 ($25,000 - $3,500), which would need to be included in gross income in the year of conversion. There is no need to amend the prior two years' tax returns or include any additional depreciation taken under MACRS.

Question 9

WAM Corporation sold a warehouse during the current year for $830,000.The building had been acquired in 1991 at a cost of $730,000 and had total straight-line depreciation of $510,000.
What is the amount and nature of the gain or loss on the sale of the warehouse?

Accepted Answer

The answer of WAM Corporation sold a warehouse during the...

Question 10

Costs of tangible personal business property which are expensed under Sec.179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

Accepted Answer

Tangible personal business property expensed under Sec.179 is subject to recapture if it is converted to nonbusiness use before the end of the MACRS recovery period. This means that if the property is sold or disposed of before the end of the recovery period, the taxpayer may have to add back some or all of the expensed amount as income.

Question 11

If no gain is recognized in a nontaxable like-kind exchange involving Sec.1245 or Sec.1250 property,the recapture potential carries over to the replacement property.

Accepted Answer

This is known as the "recapture potential" rule, and it applies specifically to exchanges of Sec. 1245 and Sec. 1250 property. If no gain is recognized in the exchange, the recapture potential (i.e. the potential tax liability on previously claimed depreciation deductions) carries over to the replacement property. This means that the taxpayer may need to recapture depreciation deductions taken on the old property at some point in the future, when they dispose of the replacement property.

Question 12

When appreciated property is transferred at death,the recapture potential carries over to the person who receives the property from the decedent.

Accepted Answer

The answer of When appreciated property is transferred at death,the...

Question 13

When gain is recognized on an involuntary conversion,gain is subject to recapture under Sec.1245 or Sec.1250.

Accepted Answer

When gain is recognized on an involuntary conversion, it is subject to recapture under either Section 1245 or Section 1250 of the Internal Revenue Code.

Question 14

A corporation sold a warehouse during the current year.The straight-line depreciation method was used.Information about the building is presented below:  How much gain should the corporation report as section 1231 gain?
A)$124,000
B)$620,000
C)$586,000
D)$710,000

Accepted Answer

To calculate the section 1231 gain, we need to compare the selling price with the adjusted basis of the asset. The adjusted basis is the original cost minus accumulated depreciation. Using the information given, the original cost of the building is $1,550,000, and assuming that the building was fully depreciated (since the straight-line depreciation method was used), the accumulated depreciation is also $1,550,000. Therefore, the adjusted basis is $0. The selling price of the building is $586,000, which means that the section 1231 gain is $586,000.

Question 15

Octet Corporation placed a small storage building in service in 2000.Octet's original cost for the building is $800,000 and the cost recovery deductions are $300,000.This year the building is sold for $1,100,000.The amount and character of the gain are
A)Ordinary gain of $60,000 and Sec.1231 gain of $540,000.
B)Ordinary gain of $300,000 and Sec.1231 gain of $300,000.
C)Ordinary gain of $600,000.
D)Sec.1231 gain of $600,000.

Accepted Answer

The answer of Octet Corporation placed a small storage building...

Question 16

In 1980,Artima Corporation purchased an office building for $400,000 for use in its business.The building is sold during the current year for $550,000.Total depreciation allowed for the building was $350,000; straight-line would have been $320,000.As result of the sale,how much section 1231 gain will Artima Corporation report?
A)$350,000
B)$406,000
C)$320,000
D)$500,000

Accepted Answer

To calculate the section 1231 gain, we need to compare the selling price of the building to its adjusted basis. The adjusted basis is the original purchase price minus the depreciation taken on the building. So, Artima Corporation's adjusted basis is $400,000 - $350,000 = $50,000.

Since the selling price of the building is higher than the adjusted basis, there is a section 1231 gain. The amount of the gain is the excess of the selling price over the adjusted basis. Thus, the section 1231 gain is $550,000 - $50,000 = $500,000.

However, we also need to consider the depreciation difference between actual and straight-line. Since actual depreciation exceeded straight-line depreciation by $30,000 ($350,000 - $320,000), there is $30,000 of recapture under section 1245. This amount reduces the section 1231 gain, resulting in a net section 1231 gain of $500,000 - $30,000 = $470,000.

Note: Choice A is incorrect because it only represents the total depreciation allowed on the building. Choice C is incorrect because it only represents the straight-line depreciation that could have been taken on the building. Choice D is incorrect because it does not take into account the adjusted basis or the depreciation difference.

Question 17

The additional recapture under Sec.291 is 25% of the difference between the amount that would have been recaptured if the property was Sec.1245 property and the actual recapture under Sec.1250.

Accepted Answer

The answer of The additional recapture under Sec.291 is 25%...

Question 18

Connors Corporation sold a warehouse during the current year for $980,000.The building had been acquired in 1980 at a cost of $830,000.The building is fully depreciated.
What is the amount and nature of the gain or loss on the sale of the warehouse?

Accepted Answer

The answer of Connors Corporation sold a warehouse during the...

Question 19

Trena LLC,a tax partnership owned equally by Trent and Nina,sells a building it had placed in service five years ago.Sec.291 will require that part of the gain (up to 20% of accumulated depreciation)be treated as ordinary gain,with the balance treated as Sec.1231 gain.

Accepted Answer

The answer of Trena LLC,a tax partnership owned equally by...

Question 20

Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

Accepted Answer

The answer of Gain recognized on the sale or exchange...

Quiz 26: Property Transactions: Section 1231 and Recapture

Installment sales of depreciable property which result in recaptured income under Secs.1245 or 1250 require that the recaptured income be recognized in the year of sale.

Frisco Inc.,a C corporation,placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner.It sold the building this year for a substantial gain.Because straight-line depreciation was used,Frisco will not need to recognize any ordinary gain.

Gifts of appreciated depreciable property may trigger recapture of depreciation of cost-recovery deductions to the donor as of the date of gift.

Maura makes a gift of a van to a local food bank run by a charity.Maura had used the van in her trade or business.The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed.What is the amount of Maura's charitable contribution deduction?

When a donee disposes of appreciated gift property,the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec.179.Depreciation of $3,500 would have been taken under the MACRS rules.If Douglas converts the furniture to nonbusiness use today,Douglas must

WAM Corporation sold a warehouse during the current year for $830,000.The building had been acquired in 1991 at a cost of $730,000 and had total straight-line depreciation of $510,000. What is the amount and nature of the gain or loss on the sale of the warehouse?