Question 1

Gains and losses are recognized when property is disposed of by gift or bequest.

Accepted Answer

False

Question 2

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

Accepted Answer

Funds borrowed and used to pay for an asset are included in the cost of the asset. The cost of the asset includes all expenses related to acquiring and preparing the asset for use, including any financing costs associated with borrowing funds.

Question 3

All recognized gains and losses must eventually be classified either as capital or ordinary.

Accepted Answer

This is true. All gains and losses must eventually be classified as either capital or ordinary for tax purposes. Capital gains and losses arise from the sale of capital assets such as stocks, homes, or rental property, while ordinary gains and losses are generated through the ordinary course of business, such as through the sale of inventory, services, or interest income.

Question 4

If Houston Printing Co.purchases a new printing press during the current year for $30,000,pays sales taxes of $2,000,and pays $1,000 for installation,the cost basis for the printing press is $33,000.

Accepted Answer

The cost basis for an asset includes the purchase price, sales taxes, and installation costs. Therefore, the cost basis for the printing press is $30,000 + $2,000 + $1,000 = $33,000.

Question 5

Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.

Accepted Answer

The IRS allows taxpayers to deduct losses that are incurred in carrying on a trade or business or incurred in an activity engaged in for profit. However, certain limitations and rules apply to these deductions, so it is important to consult a tax professional or IRS guidelines for specific details.

Question 6

An uncle gifts a parcel of land to his niece,and he has to pay gift taxes.The land has appreciated substantially since he purchased it 20 year ago.A portion of gift taxes paid by the uncle will increase the niece's basis of the land.

Accepted Answer

When a gift is given, the recipient's basis in the gifted property is generally the same as the donor's basis. However, if gift taxes are paid by the donor, the recipient can increase their basis by the portion of gift taxes paid. This is known as the gift tax basis rule. Therefore, in this scenario, a portion of the gift taxes paid by the uncle will increase the niece's basis of the land.

Question 7

For purposes of calculating depreciation,property converted from personal use to business use will take on a basis equal to the lower of its FMV or its adjusted basis on the date of the conversion.

Accepted Answer

This is true according to IRS rules for calculating depreciation on converted property. The basis of the property is the lower of its fair market value or adjusted basis on the date of the conversion.

Question 8

On January 1,2013,Brad purchased 100 shares of stock at $4,000.By December 31,2013,the stock had declined in value to $2,200,but Brad still held the shares.For 2013,Brad has recognized a $1,800 loss for tax purposes.

Accepted Answer

Brad has not recognized a loss for tax purposes because he has not sold the shares. A loss is only recognized for tax purposes when the asset is sold or disposed of.

Question 9

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.

Accepted Answer

This is the general rule for expensing expenses for tax purposes. However, there are certain limitations and exceptions to this rule, so it is important to consult with a tax professional for specific guidance on expensing expenses.

Question 10

Unless the alternate valuation date is elected,the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.

Accepted Answer

This is known as the "step-up" basis rule under the Internal Revenue Code. However, if the alternate valuation date is elected, the basis would be the fair market value of the property on the alternate valuation date (six months after the date of death).

Question 11

Capitalization of interest is required if debt is incurred to construct real property.

Accepted Answer

According to the IRS, if debt is incurred to construct real property, capitalization of interest is required. This means that the interest on the debt is added to the cost of the property and depreciated over the useful life of the property.

Question 12

In 2013,five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Accepted Answer

In 2013, there were five different capital gain tax rates that could apply to long-term capital assets sold by noncorporate taxpayers. The rates ranged from 0% to 23.8%, depending on the taxpayer's income level and the type of asset sold.

Question 13

Interest incurred during the development and manufacture of a machine must be capitalized.

Accepted Answer

According to accounting standards, interest incurred during the development and manufacture of a machine is considered a cost of acquiring the asset and must be capitalized. This means that it is added to the cost of the machine and recorded as an asset on the balance sheet, rather than expensed in the current period.

Question 14

A taxpayer purchased an asset for $50,000 several years ago.He is now planning to sell it.Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.

Accepted Answer

The answer of A taxpayer purchased an asset for $50,000...

Question 15

If stock sold or exchanged is not specifically identified,the FIFO (first-in,first-out)method of identification must be used.

Accepted Answer

This statement is true according to IRS regulations. If specific identification is not used, the default method is FIFO.

Question 16

A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000.The taxpayer has a realized gain of $3,000.

Accepted Answer

The realized gain is calculated by subtracting the basis (cost) of the asset from the sale price. In this case, the realized gain is $28,000 - $25,000 = $3,000.

Question 17

The initial adjusted basis of property depends upon how the property is acquired.

Accepted Answer

The initial adjusted basis of property is affected by the method of acquisition, such as purchase, inheritance, or gift.

Question 18

With regard to taxable gifts after 1976,no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.

Accepted Answer

This is true. If the donor's basis in the gifted property is greater than its fair market value (FMV) at the time of the gift, the recipient's basis is established at the donor's basis. No gift tax is added to this basis. However, if the donor's basis is less than the FMV, the recipient's basis is established at the FMV, and any gift tax paid is added to this basis.

Question 19

All realized gains and losses are recognized for tax purposes.

Accepted Answer

The answer of All realized gains and losses are recognized...

Question 20

Rick sells stock of Ty Corporation,which has an adjusted basis of $20,000,for $22,000.He pays a sales commission of $500.In computing his gain or loss,the amount realized by Rick is $1,500.

Accepted Answer

The amount realized by Rick should be calculated as the selling price ($22,000) minus the adjusted basis ($20,000) minus the sales commission ($500), which equals $1,500. Therefore, the answer is false.

Quiz 5: Property Transactions: Capital Gains and Losses