Question 1

Harry owns equipment ($50,000 basis and $38,000 FMV)and a building ($140,000 basis and $156,000 FMV),which are used in his business.The two assets were acquired five years ago.Both the equipment and the building are destroyed in a fire,and Harry collects insurance proceeds equal to the assets' FMV.The tax result to Harry for this transaction is

Accepted Answer

Involuntary conversions of business property are generally treated as Section 1231 gains and losses, which can result in capital gain treatment if the gains exceed the losses.

Question 2

If Sec.1231 applies to the sale or exchange of an unharvested crop sold with land,the costs of producing the crop are

Accepted Answer

According to Sec. 1231, the sale or exchange of an unharvested crop sold with land is treated as a sale of a capital asset. Therefore, the costs of producing the crop are capitalized and can be deducted as a capital loss if the sale results in a loss, or can be used to reduce any gain from the sale.

Question 3

A corporation owns many acres of timber,which it acquired three years ago,and which has a $150,000 basis for depletion.The timber is cut during the current year for use in the corporation's business.The FMV of the timber on the first day of the current year is $280,000.If the corporation makes the appropriate election,the tax result is

Accepted Answer

The corporation can elect to treat the cutting of timber as a sale or exchange under Section 631(a), resulting in a Section 1231 gain of $130,000, which is the FMV of $280,000 minus the basis of $150,000.

Question 4

Which of the following assets is 1231 property?

Accepted Answer

1231 property refers to assets used in a trade or business, including real estate, equipment, and other tangible personal property. Option A refers to a machine used in the company's manufacturing operations, which is a typical example of 1231 property. Options B, C, and D are not 1231 property since they are not used in a trade or business but rather are investments or held for resale.

Question 5

If realized gain from disposition of business equipment exceeds total depreciation or cost recovery,a portion of the gain will receive Sec.1231 treatment if the equipment's holding period is more than one year.

Accepted Answer

This statement is true. If the realized gain from the disposition of business equipment exceeds the total depreciation or cost recovery, a portion of the gain will receive Sec.1231 treatment if the equipment's holding period is more than one year. If the equipment is held for less than one year, the gain will be treated as ordinary income.

Question 6

Sec.1231 property will generally have all the following characteristics except

Accepted Answer

Sec.1231 property must be real or depreciable property and used in trade or business, and must be held for more than one year to qualify for favorable tax treatment. However, it is not required to be held for sale to customers.

Question 7

If the accumulated depreciation on business equipment held longer than one year exceeds realized gain on the sale of the equipment,all of the realized gain will be treated as Sec.1231 gain.

Accepted Answer

The realized gain up to the amount of accumulated depreciation is treated as ordinary income under Sec. 1245, not Sec. 1231 gain. Only the gain exceeding the accumulated depreciation is treated as Sec. 1231 gain.

Question 8

Gain due to depreciation recapture is included in the netting of Sec.1231 gains and losses.

Accepted Answer

The answer of Gain due to depreciation recapture is included...

Question 9

Cassie owns equipment ($45,000 basis and $30,000 FMV)and a building ($152,000 basis and $158,000 FMV),which are used in Cassie's business.Both assets were acquired two years ago.The equipment and the building are destroyed in a fire,and Cassie collects insurance proceeds equal to the assets' FMV.The tax result to Cassie for this transaction is a

Accepted Answer

The answer of Cassie owns equipment ($45,000 basis and $30,000...

Question 10

A corporation owns many acres of timber,which it acquired three years ago,and which has a $120,000 basis.The timber was cut last year for use in the corporation's business.The FMV of the timber on the first day of last year was $270,000.The corporation made the appropriate election to treat the cutting as a sale or exchange.The timber is sold for $300,000 this year.The tax result this year is

Accepted Answer

The answer of A corporation owns many acres of timber,which...

Question 11

For a business,Sec.1231 property does not include

Accepted Answer

Sec.1231 property includes tangible property used in a trade or business and held for more than one year. However, inventory purchased within the last 24 months is not considered Sec.1231 property. Therefore, choice B is not included as Sec.1231 property. Choices A, C, and D are all potential examples of Sec.1231 property.

Question 12

If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e.,a net loss from the casualty),all of the involuntary conversions are treated as ordinary gains and losses.

Accepted Answer

This statement is true. If the recognized losses from involuntary conversions exceed the recognized gains, then the entire amount is treated as ordinary gains and losses for tax purposes.

Question 13

This year Pranav had the gains and losses noted below on property,plant and equipment used in his business.Each asset had been held longer than one year. $$\begin{array} {| l | r| } 
\hline\text { Gain due to insurance reimbursement for fire } & \$ 17,000 \
\hline \text { Loss due to condemnation } & ( 12,000 ) \
\hline \text { Gain on sale of Sec. 1231 property } & 21,000 \
\hline
\end{array}$$ A review of Pranav's reporting of Sec.1231 transactions for the prior five years indicates a net Sec.1231 loss of $14,000 three years ago and a net Sec.1231 gain of $8,000 last year (before the five-year lookback).Pranav will recognize

Accepted Answer

The answer of This year Pranav had the gains and...

Question 14

Emma owns a small building ($120,000 basis and $123,000 FMV)and equipment ($35,000 adjusted basis and $22,000 FMV).Both assets were acquired three years ago and are used in Emma's business.Both are destroyed by fire.Insurance proceeds were equal to their FMVs.Only one other transfer of an asset occurs during the year,and a $3,000 LTCL is recognized.After considering all transactions,the tax result to Emma is a

Accepted Answer

The answer of Emma owns a small building ($120,000 basis...

Question 15

This year Jenna had the gains and losses noted below on property,plant and equipment used in her business.Each asset had been held longer than one year.Jenna has not previously disposed of any business assets. $$\begin{array} { |l | r| } 
\hline\text { Loss due to insurance reimbursement for fire } & \$ ( 17,000 ) \
\hline \text { Loss due to condemnation } & ( 12,000 ) \
\hline \text { Gain on sale of Sec. } 1231 \text { property } & 21,000 \
\hline
\end{array}$$ Jenna will recognize

Accepted Answer

The loss due to insurance reimbursement for fire and the loss due to condemnation are both ordinary losses. The gain on sale of Sec. 1231 property is a long-term capital gain.

Question 16

A taxpayer sells equipment used in her business for $50,000.She purchased the equipment three years ago for $90,000 and claimed $35,000 of depreciation over the three years of usage.The recapture provisions of Sec.1245 will result in the taxpayer recognizing some ordinary income.

Accepted Answer

The answer of A taxpayer sells equipment used in her...

Question 17

In order to be considered Sec.1231 property,all of the following livestock must be held for 12 months or more from date of acquisition except

Accepted Answer

Cattle must be held for 24 months or more to be considered Sec. 1231 property, unlike the other livestock listed which require a holding period of 12 months.

Question 18

Dinah owned land with a FMV of $130,000 (adjusted basis $120,000)which is investment property (a capital asset).Dinah owned a second tract of land,a 1231 asset,with a FMV of $46,000 (adjusted basis $50,000).Both tracts were acquired in 2001 and condemned by the state this year.The state paid an amount equal to FMV.If there are no other transactions involving capital assets or 1231 assets,Dinah must report on her current year return

Accepted Answer

The answer of Dinah owned land with a FMV of...

Question 19

The purpose of Sec.1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec.1231 treatment when the asset was sold.

Accepted Answer

Sec.1245 is designed to ensure that taxpayers do not receive an unfair tax advantage by claiming depreciation deductions on assets, and then benefiting from favorable treatment under Sec.1231 when those assets are sold. Instead, Sec.1245 requires certain types of property to be treated as ordinary income when sold, thus offsetting the potential tax benefits of depreciation deductions.

Question 20

For livestock to be considered Sec.1231 property

Accepted Answer

According to the IRS, cattle and horses must be held for at least 24 months from the date of acquisition to be considered Sec. 1231 property. This means that if the livestock is held for breeding, dairy, or draft purposes, any gains or losses from its sale will be treated as long-term capital gains or losses, which can have tax benefits.

Quiz 29: Property Transactions: Sec1231 and Recapture