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Exam 14: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

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Question 21

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Verway, Inc., has a 2019 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2017. For 2019, Verway's net § 1231 gain is treated as:

A) $55,000 ordinary loss.
B) $55,000 ordinary gain.
C) $55,000 capital loss.
D) $55,000 capital gain.
E) None of these.

F) B) and D)
G) B) and C)

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Question 22

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Business equipment is purchased on March 10, 2018, used in the business until September 29, 2018, and sold at a $23,000 loss on October 10, 2018. The equipment was not suitable for the work the business had purchased it for. The loss on the disposition should have been reported in the 2018 Form 4797, Part:

A) I.
B) II.
C) III.
D) IV.
E) This transaction would not be reported in the Form 4797.

F) A) and B)
G) None of the above

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Question 23

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Individuals who are not professional real estate developers may get capital gain treatment for the sale of their real property if they engage only in limited development activities.

Describe the circumstances in which the maximum unrecaptured § 1250 gain (25% gain) does not become part of the Schedule D netting process for an individual taxpayer?

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Tan, Inc., sold a forklift on April 12, 2019, for $8,000 (its FMV) to its 100% shareholder, Ashley. Tan's adjusted basis for the forklift was $12,000. Ashley's holding period for the forklift:

A worthless security had a holding period of six months when it became worthless on December 10, 2018. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?

Section 1231 property includes nonpersonal use property whose casualty gains exceed casualty losses for the taxable year.

In 2019, Mark has $18,000 short-term capital loss, $7,000 28% gain, and $6,000 0%/15%/20% gain. Which of the following statements is correct?

A business taxpayer sold all the depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses. The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets. The taxpayer had unrecaptured § 1231 lookback loss of $22,000. What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer's adjusted gross income? (Ignore the self- employment tax deduction.) $\begin{array} { l c c c c } \text { Asset } & \text { Purchase Date } & \text { Sale Date } & \text { Depreciation } & \text { Gain (Loss) } \\\text { Machine 1 } & 10 / 10 / 17 & 11 / 11 / 19 & \$ 323,000 & \$ 66,000 \\\text { Machine 2 } & 10 / 02 / 16 & 11 / 11 / 19 & 65,000 & ( 15,000 ) \\\text { Machine 3 } & 09 / 23 / 15 & 11 / 11 / 19 & 183,000 & 23,000 \\\text { Machine 4 } & 09 / 23 / 15 & 11 / 11 / 19 & 28,000 & 34,000\end{array}$

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating. The taxpayer immediately sells the note to a bank for less than the note's stated value. The taxpayer has an ordinary loss.

The following chart details Sheen's 2017, 2018, and 2019 stock transactions. What is the capital loss carryover to 2019 and what is the net capital gain or loss for 2019? $\begin{array}{rrrrr}\text { Short-Term } & \begin{array}{r}\text { Short-Term } \\\text { Capitalgains }\end{array} & \begin{array}{r}\text { Short-Term } \\\text { CapitalLosses }\end{array} & \begin{array}{r}\text { Long-Term } \\\text { CapitalGains }\end{array} & \begin{array}{r}\text { Long-Term } \\\text { CapitalLosses }\end{array}\\2017 & \$ 4,000 & \$ 6,000 & \$ 2,000 & \$ 13,000 \\2018 & \$ 16,000 & \$ 14,000 & \$ 23,000 & \$ 28,000 \\2019 & \$ 55,000 & \$ 52,000 & \$ 67,000 & \$ 33,000\end{array}$

To compute the holding period, start counting on the day after the property was acquired and include the day of disposition.

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.

Theresa and Oliver, both over 65 years of age and married filing jointly, have no dependents. Their 2019 income tax facts are: Theresa's wages $165,000 Oliver's wages 33,000 Short-term capital gain 36,000 Long-term capital loss (41,000) What is their taxable income for 2018?

Sara is filing as head of household and has 2018 taxable income of $57,000, which includes $3,000 of net long-tem capital gain. The net long-term capital gain is made up of $1,000 25% gain and $2,000 0%/15%/20% gain. What is the tax on her taxable income using the alternative tax method? Note: Use the tax rate schedule rather than the tax table.

Section 1231 property generally does not include artistic compositions.

The following assets in Jack's business were sold in 2018: $\begin{array} { l l l } \text { Asset } & \text { HoldingPeriod } & \text { Gain/(Loss) Office } \\\text { equipment } & 6 \text { years } & \$ 1,100 \\\text { Automobile } & 8 \text { months } & ( \$ 800 ) \mathrm { ABC } \mathrm { stock } \\\text { (capital asset) } & 2 \text { years } & \$ 1,400\end{array}$ Office equipment, purchased for $8,000, had a zero adjusted basis. The automobile was purchased for $2,000 and sold for $1,200. The ABC stock was purchased for $1,800 and sold for $3,200. In 2018 (the year of sale) , Jack should report what amount of net capital gain and net ordinary income?

A net § 1231 loss is treated as an ordinary loss.

Harold is a head of household, has $27,000 of taxable income in 2019 from noncapital gain or loss sources, and has the following capital gains and losses: $\begin{array} { l r } 28 \% \text { long-term capital gain } & \$ 4,300 \\28 \% \text { long-term capital loss } & ( 2,000 ) \\0 \% / 15 \% / 20 \% \text { long-term capital gain } & 19,000 \\\text { Short-term capital loss } & ( 1,700 )\end{array}$ What is Harold's taxable income and the tax on that taxable income (ignore the standard deduction)?