Question 1

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 Sec. 1231 gain will be treated as net capital gain, and because her tax rate is 10%, the NCG rate that applies to the gain is 0%.

Question 2

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

Accepted Answer

The property must be held more than one year.

Question 3

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

The 1231 gains are treated as LTCG taxed at a maximum of 15%. ($29,000 + $11,000 = $40,000).

Question 4

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

The Sec. 1231 gain will be treated as a LTCG. The LTCG rate for taxpayers with a marginal tax rate of 15% is zero.

Question 5

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

Unless the holding period is satisfied, the gain or loss on otherwise qualifying property will be ordinary.

Question 6

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...

Question 7

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

Accepted Answer

A holding period of more than one year is required of property that otherwise meets the criteria of Sec. 1231.

Question 8

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%...

Question 9

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

Responses A - C all provide accurate reasons for the adoption of IRC Sec. 1231.

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

$14,000 of the gain will be recharacterized as ordinary income due to the five-year lookback rule. The recharacterization is first applied to the net Sec. 1231 gain in the 25% group (unrecaptured Sec. 1250 gain).

Question 11

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

Net Sec. 1231 losses are deducted as ordinary losses when incurred, but they cause net Sec. 1231 gains within the following five years to be recaptured as ordinary income rather than LTCG.

Question 12

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

If the netting of Sec. 1231 gains and losses at the end of the year results in a net loss, the Sec. 1231 gains and losses are treated as ordinary gains and losses.

Question 13

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...

Question 14

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

If, when netted, Sec. 1231 losses exceed Sec. 1231 gains, both are treated as ordinary.

Question 15

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 $4,000 is considered a nonrecaptured net Sec. 1231 loss. Thus, of the net Sec. 1231 gain of $10,000 ($35,000 - $25,000), $4,000 is ordinary income.

Question 16

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 lookback rule does not apply because the last 1231 loss was six years ago. Thus, the net Section 1231 gain is $12,000 ($30,000 - $18,000) to be treated as long-term capital gain.

Question 17

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

If, when netted, Sec. 1231 losses exceed Sec. 1231 gains, both are treated as ordinary. Therefore, AGI is $50,000 + ($12,000 - $16,000) = $46,000.

Question 18

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

The $25,000 net Sec. 1231 gain is treated as LTCG which will be netted with the $18,000 STCL, resulting in $7,000 net capital gain.

Question 19

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

In general, net 1231 gains are treated as LTCGs. However, $8,000 (from the total $15,000) of the non-recaptured Sec. 1231 loss is recaptured as ordinary income.

Question 20

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

The lookback rule does not apply because the last 1231 loss was six years ago. Therefore, the entire amount ($40,000- $22,000) is LTCG and is taxed at 15%. 15% × $18,000 = $2,700.

Quiz 13: Property Transactions: Section 1231 and Recapture

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

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

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 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.

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.

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

Why did Congress establish favorable treatment for 1231 assets?

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.

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.

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

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, 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

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?

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

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)