Question 1

Foreaker LLC sold a piece of land that it uses in its business for $52,000.Foreaker bought the land two years ago for $42,500.What is the amount and character of Foreaker's gain?

Accepted Answer

The difference between the selling price ($52,000) and the cost basis ($42,500) is $9,500. Since the land was used in the taxpayer's trade or business, the gain is considered a §1231 gain, which is characterized as long-term capital gains. Therefore, the correct answer is option B.

Question 2

Butte sold a machine to a machine dealer for $50,000.Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine.What is the amount and character of Butte's gain or loss?

Accepted Answer

The answer of Butte sold a machine to a machine...

Question 3

The sale of land held for investment results in the following type of gain or loss?

Accepted Answer

The sale of land held for investment results in capital gain or loss.

Question 4

Sumner sold equipment that it uses in its business for $30,000.Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense.Assuming that this is Sumner's only disposition during the year,what is the amount and character of Sumner's gain or loss?

Accepted Answer

The calculation of gain or loss on the sale of property involves comparing the amount received from the sale to the adjusted basis of the property. The adjusted basis is the original cost of the property minus any depreciation claimed. In this case, Sumner sold the equipment for $30,000, and the adjusted basis of the property is $80,000 - $40,000 = $40,000.

Since Sumner sold the property for less than the adjusted basis, there is a loss on the sale. However, the type of loss depends on the nature of the property sold. In this case, the property is considered to be §1231 property since it is used in a trade or business.

Therefore, the loss is classified as a §1231 loss, which can be used to offset any other gains or losses from the sale of §1231 property during the year.

Question 5

What is the character of land used in an active trade or business for two years?

Accepted Answer

Section 1231 of the U.S. Internal Revenue Code classifies property used in a trade or business and held for more than one year as §1231 property. This classification allows for the favorable treatment of gains, where they are taxed at capital gains rates, and losses, which can be deducted as ordinary losses.

Question 6

Which of the following results in an ordinary gain or loss?

Accepted Answer

The sale of inventory results in an ordinary gain or loss. The other options can result in either long-term capital gains or losses or §1231 gains or losses, which have different tax treatment.

Question 7

Leesburg sold a machine for $2,200 on November 10ᵗʰ of the current year.The machine was purchased for $2,600.Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale.What is Leesburg's gain or loss realized on the machine?

Accepted Answer

The gain realized is the $2,200 amount realized less the $1,400 ($2,600 - $1,200) adjusted basis.

Question 8

The sale of machinery for more than the original cost basis (before depreciation),used in a trade or business,and held for more than one year results in the following types of gain or loss?

Accepted Answer

Because the sales price exceeds the original basis, §1245 depreciation recapture and §1231 gain will be recognized.

Question 9

The sale of computer equipment used in a trade or business for 9 months results in the following type of gain or loss?

Accepted Answer

Assets used in a trade or business and held for one year or less are ordinary assets.

Question 10

Which of the following transactions results solely in §1245 gain?

Accepted Answer

Section 1245 recapture applies to depreciable personal property, including machinery, which is sold at a gain. If the accumulated depreciation exceeds the gain realized upon sale, the entire gain will be characterized as §1245 gain. Therefore, the only transaction solely resulting in §1245 gain is the sale of machinery held for more than one year where the accumulated depreciation exceeds the gain realized.

Question 11

Bozeman sold equipment that it uses in its business for $80,000.Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense.What is the amount and character of Bozeman's gain or loss?

Accepted Answer

The answer of Bozeman sold equipment that it uses in...

Question 12

Which of the following does not ultimately result in a capital gain or loss?

Accepted Answer

Inventory is always an ordinary asset because it is held in the ordinary course of a trade or business.

Question 13

Which of the following sections does not recapture or recharacterize a taxpayer's gain?

Accepted Answer

Sections §1239, §1250, §1245, and §291 all involve specific rules for recapturing or recharacterizing a taxpayer's gain under certain conditions, indicating that none of the choices provided are sections that do not recapture or recharacterize a taxpayer's gain.

Question 14

Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains?

Accepted Answer

Section 291 specifically deals with the recapture of depreciation for corporate taxpayers, recharacterizing certain gains as ordinary income rather than capital gains.

Question 15

Brad sold a rental house that he owned for $250,000.Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense.What is the amount and character of Brad's gain or loss?

Accepted Answer

Brad's gain is calculated by subtracting the adjusted basis (original cost minus depreciation) from the selling price. The adjusted basis is $225,000 - $50,000 = $175,000. Selling price ($250,000) minus adjusted basis ($175,000) equals a $75,000 gain. This gain is split into two parts: $25,000 §1231 gain (the difference between the selling price and the original cost) and $50,000 unrecaptured §1250 gain (the recapture of depreciation claimed).

Question 16

Which of the following gains does not result solely in an ordinary gain or loss?

Accepted Answer

The sale of equipment where the gain realized exceeds the accumulated depreciation does not result solely in an ordinary gain or loss because the portion of the gain exceeding the accumulated depreciation is treated as a Section 1231 gain, which can be taxed as a long-term capital gain if certain conditions are met.

Question 17

Which of the following is true regarding depreciation recapture?

Accepted Answer

Depreciation recapture changes the character of a gain from capital gain to ordinary income. It applies to certain assets, such as real estate and depreciable personal property that are sold for more than their adjusted basis.

Question 18

Bateman Corporation sold an office building that it used in its business for $800,000.Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense.What is the amount and character of Bateman's gain or loss?

Accepted Answer

For corporations, §291 recapture is 20 percent of the lesser of depreciation taken or the recognized gain as ordinary income. The remaining gain is §1231.

Question 19

Which of the following is not a §1245 asset if held for more than one year?

Accepted Answer

Land is not considered a §1245 asset, regardless of how long it is held.

Question 20

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?

Accepted Answer

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in a §1231 loss. This type of loss can be partially or fully offset by other gains in the same category, and any remaining loss can be deducted as an ordinary loss up to a $3,000 limit per year.

Quiz 10: Property Dispositions