Question 1

Johnny owned a gas station with an adjusted basis of $300,000. After it was destroyed in a fire, he received $560,000 from the insurance company. Within the next year, he bought a new gas station for $500,000. What is Johnny's taxable gain and what is the basis in the new building?

Accepted Answer

Johnny's taxable gain is the difference between the insurance proceeds and the adjusted basis of the destroyed building, which is $560,000 - $300,000 = $260,000. 
His basis in the new building is the cost of the new building, which is $500,000.

Question 2

Tim sells land to Brad for $90,000. Tim originally purchased the land for $50,000. Brad agrees to pay Tim six annual installments of $15,000 each. In year three, Brad makes his third installment of $15,000. How much taxable gain will Tim have in year three?

Accepted Answer

To find the taxable gain, we need to first calculate the total profit Tim will make from the sale of the land.

Profit = Sale Price - Original Cost
Profit = $90,000 - $50,000
Profit = $40,000

Tim will recognize a portion of this profit each year as Brad makes his installment payments. We can calculate the taxable gain using the following formula:

Taxable Gain = Profit x (Payment Received / Total Sale Price)

For year three, we know that Brad has made three installment payments of $15,000 each, so he has paid a total of $45,000 so far.

Total Sale Price = $90,000
Payment Received = $45,000

Taxable Gain = $40,000 x ($45,000 / $90,000)
Taxable Gain = $20,000 x 0.5
Taxable Gain = $10,000

However, Tim already recognized some of this profit in years one and two, so we need to subtract the taxable gains he already recognized.

In year one, Tim recognized a taxable gain of $10,000. 
In year two, Tim recognized a taxable gain of $6,667.

Total Taxable Gain Recognized = $10,000 + $6,667
Total Taxable Gain Recognized = $16,667

Therefore, the taxable gain that Tim will recognize in year three is:

Taxable Gain = $10,000 - $16,667
Taxable Gain = -$6,667

This means that Tim will actually have a loss in year three since the taxable gain from years one and two was greater than the installment payment received in year three. The correct answer is therefore B.

Question 3

Perry acquired raw land as an investment in 1997. The land cost $60,000. In 2014, the land is sold for a total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. If Perry elects to recognize the entire gain in the year of sale, what is his recognized gain in 2014?

Accepted Answer

Perry's total gain is calculated as the sales price ($120,000) minus the cost basis ($60,000) = $60,000. Since Perry elected to recognize the entire gain in the year of sale, his recognized gain in 2014 is equal to the total gain, which is $60,000.

Question 4

Sally acquired an apartment building in 1999 for $150,000 and sold it for $410,000 in 2014. At the time of the sale, there is $65,000 of accumulated straight-line depreciation on the apartment building. Assuming Sally is in the 35 percent tax bracket for ordinary income, how much of her gain is taxed at 15 percent?

Accepted Answer

Sally's adjusted basis for calculating gain is calculated as follows:

Adjusted basis = original cost - accumulated depreciation
Adjusted basis = $150,000 - $65,000
Adjusted basis = $85,000

Sally's total gain on the sale is calculated as follows:

Total gain = selling price - adjusted basis
Total gain = $410,000 - $85,000
Total gain = $325,000

Since Sally is in the 35% tax bracket for ordinary income, her long-term capital gains tax rate is 15%. The amount of the gain that is taxed at 15% is calculated as follows:

Amount taxed at 15% = total gain - (accumulated depreciation * tax rate)
Amount taxed at 15% = $325,000 - ($65,000 * 0.15)
Amount taxed at 15% = $325,000 - $9,750
Amount taxed at 15% = $315,250

Therefore, $260,000 of Sally's gain is taxed at 15%. The answer is C.

Question 5

The following are owned by Robert. Indicate which are capital assets.
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a. Rental property at 123 Main Street ______
b. Tables and chairs sold in his furniture business ______
c. The cash register used in his furniture business ______
d. A 1972 Porsche 916 ______
e. The rights to Weezer's song, "The Good Life" ______

Accepted Answer

The answer of The following are owned by Robert. Indicate...

Question 6

If the following are capital assets, mark with a "Yes." If they are not capital assets, mark with a "No."
a. A taxpayer's personal jet ski ______
b. Ford Motor Credit Company bond held by an investor ______
c. A baseball for sale at Sports.com ______
d. J.K. Rowling's personal copy of her original manuscript ofHarry Potter and the Sorcerer's Stone ______
e. An antique grandfather clock inherited from the taxpayer's aunt ______

Accepted Answer

The answer of If the following are capital assets, mark...

Question 7

Perry acquired raw land as an investment in 2000. The land cost $60,000. In 2014, the land is sold for a total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. Assume that Perry uses the installment method to recognize the gain and receives only the $10,000 down payment in the year of sale. How much gain should Perry recognize in 2014?

Accepted Answer

The gain recognized in 2014 is calculated by determining the gross profit percentage and applying it to the cash received. The gross profit is $60,000 ($120,000 sales price - $60,000 cost). The gross profit percentage is 50% ($60,000 gross profit / $120,000 sales price). Applying this percentage to the $10,000 cash received results in a recognized gain of $5,000 (50% of $10,000).

Question 8

Terry has a casualty gain of $1,000 and a casualty loss of $5,400, before the $100 floor and before the adjusted gross income limitation. The gain and loss were the result of two separate casualties occurring during 2014 and both properties were personal-use assets. If Terry itemizes deductions on her 2014 return and has adjusted gross income of $25,000, what is Terry's gain or net itemized deduction as a result of these casualties?

Accepted Answer

The answer of Terry has a casualty gain of $1,000...

Question 9

Simon sold investment property 2 years ago for $750. Simon's basis in the property was $300. Simon is receiving $150 per year from the buyer. Simon reports this income on the installment method. If Simon collects $150 in principal during the current year, how much gain should he report from the sale for the year?

Accepted Answer

Simon's total gain from the sale is $450 ($750 sale price - $300 basis). The gross profit percentage is $450/$750 = 60%. Therefore, for each $150 installment received, Simon reports 60% as gain, which is $90.

Question 10

Simonne, a single taxpayer, bought her home in La Jolla 25 years ago for $55,000. She has lived continuously in the home since she purchased it. In December, 2014, she sells her home for $395,000. What is Simonne's taxable gain on the sale?

Accepted Answer

To calculate taxable gain, we need to take the selling price of the house and subtract the cost basis (which is the purchase price plus any improvements made over the years) and any selling expenses (such as real estate commissions). In this case, Simonne's cost basis would be the $55,000 purchase price plus any improvements made over the years. Since we are not given any information about improvements, we assume there were none. Therefore, her cost basis is $55,000. Selling expenses are also not given, but we assume they are $0 for simplicity. Therefore, Simonne's taxable gain on the sale is $395,000 - $55,000 = $340,000. However, there is a single taxpayer exclusion of $250,000, so Simonne's taxable gain is reduced to $90,000.

Question 11

In January 2014, Keyaki Construction Company exchanged an old truck, which cost $53,000 and had accumulated depreciation of $16,000, for a new truck having a fair market value of $65,000. In connection with the exchange, Keyaki paid $32,000 in cash. What is the tax basis of the new truck?

Accepted Answer

The answer of In January 2014, Keyaki Construction Company exchanged...

Question 12

Which one of the following qualifies as a like-kind exchange?

Accepted Answer

A like-kind exchange is a tax-free exchange of property for property of the same nature or character, even if they differ in grade or quality. In this case, a Dodge Ram pickup truck used in business is being exchanged for a new Ford 250 pickup truck, which is also intended for business use. As both are pickup trucks used in business, they qualify as like-kind property. A, B, and C do not qualify as like-kind exchanges, as they involve different types of property.

Question 13

Which of the following statements is true?

Accepted Answer

None of the statements are true. A personal residence does not qualify for a like-kind exchange, the exclusion of realized gain from the sale of a personal residence is subject to certain limitations and requirements, and there is no one-time election available for taxpayers 55 years of age or older to exclude all realized gain from the sale of their personal residence.

Question 14

Which of the following statements is correct with respect to the deferral provisions of the Tax Code?

Accepted Answer

The answer of Which of the following statements is correct...

Question 15

Casualty gains and losses from business or investment property:

Accepted Answer

Casualty gains and losses from business or investment property may be treated differently depending on whether the property has been held 1 year or less or has been held over 1 year. If the property has been held 1 year or less, any gain is treated as ordinary income and any loss is fully deductible. If the property has been held over 1 year, any gain is treated as a long-term capital gain and any loss is deductible up to $3,000 per year with the remaining loss carried forward to future years.

Question 16

Which of the following is true of a like-kind exchange:

Accepted Answer

To qualify for a like-kind exchange under IRS rules, both properties involved must be held for productive use in a trade or business, or as investment property. Personal residences do not qualify for like-kind exchanges.

Option A is incorrect because cash may be exchanged, but doing so may result in taxable gain for the seller.

Option C is incorrect because office furniture and computers are not considered to be like-kind property.

Option D is incorrect because the holding period for the new property received in the exchange includes the holding period of the property that was exchanged.

Question 17

Joseph exchanged land (tax basis of $34,000), that he had held for 4 years as an investment, for similar land valued at $42,000 which was owned by Adrian. In connection with this transaction, Adrian assumed Joseph's $11,000 mortgage. As a result of this transaction Joseph should report a long-term capital gain of:

Accepted Answer

The answer of Joseph exchanged land (tax basis of $34,000),...

Question 18

In 2014, Tim sells Section 1245 property for $28,000 that he had purchased in 2008. Tim has claimed $7,000 in depreciation on the property and originally purchased it for $20,000. How much of the gain is taxable as ordinary income?

Accepted Answer

The gain from the sale of Section 1245 property is taxable as ordinary income to the extent of the depreciation taken. Tim claimed $7,000 in depreciation, so $7,000 of the gain is taxable as ordinary income.

Question 19

On August 8, 2014, Sam, single, age 62, sold for $210,000 his principal residence, which he has lived in for 10 years, and which had an adjusted basis of $60,000. On November 1, 2014, he purchased a new residence for $80,000. For 2014, Sam should recognize a gain on the sale of his residence of:

Accepted Answer

Sam qualifies for the exclusion of up to $250,000 of gain from the sale of his principal residence because he is single and has lived in the home for at least 2 of the last 5 years. The gain is $150,000 ($210,000 - $60,000), which is fully excluded, so he recognizes $0 gain.

Question 20

Jerry bought his home 15 years ago for $60,000. Three years ago Jerry married Debbie and she moved into the same house and has lived there since. If they sell Jerry's house in December, 2014 for $340,000, what is their taxable gain on a joint tax return?

Accepted Answer

Jerry and Debbie can exclude up to $500,000 of gain on the sale of their primary residence if they file a joint tax return and meet the ownership and use tests. Jerry owned the home for more than 2 years, and both have lived there for at least 2 years. Therefore, their gain of $280,000 ($340,000 - $60,000) is fully excluded, resulting in a taxable gain of $0.

Quiz 8: Capital Gains and Losses