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

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Question 61

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A worthless security had a holding period of 11 months when it became worthless on December 10, 2012.The investor who had owned the security had a basis of $10,000 for it.Which of the following statements is correct?

A) The investor has a long-term capital loss of $10,000.
B) The investor has a short-term capital loss of $10,000.
C) The investor has a nondeductible loss of $10,000.
D) The investor has a short-term capital gain of $10,000.
E) None of the above.

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

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Question 62

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Suzy purchased vacant land in 2005 that she subdivided for resale as lots.All 10 of the lots were sold during 2012.The lots had a tax basis of $9,000 each and sold for $45,000 each.Suzy made no substantial improvements to the lots.She acted as her own real estate broker; so there were no sales expenses for selling the lots.Which of the following statements is correct?

A) Suzy must hold the lots for at least 10 years before she is eligible for the special capital gain treatment of § 1237.
B) The $360,000 gain from the sale of the ten lots is all ordinary income.
C) All of the $360,000 gain from the sale of the ten lots is long-term capital gain.
D) To be eligible for the special capital gain treatment of § 1237, Suzy must be a real estate dealer.
E) None of the above.

F) D) and E)
G) C) and D)

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Question 63

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Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.

Harry inherited a residence from his mother when she died.The mother had a tax basis of $566,000 for the residence when she died and the residence was worth $433,000 at the date of her death.Which of the statements below is correct?

Involuntary conversion gains may be deferred if the proceeds of the involuntary conversion are reinvested.

Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers, rights, and a continuing interest.Mauve Company (the franchisee) makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?

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

Marvin is in the business of song writing.He writes jingles for web ads. He writes a song and sells it for a lump sum. He has:

Tom has owned 40 shares of Orange Corporation stock for five years.He sells the stock short for a total of $1,100.One month later, he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600.Tom has a $500 short-term capital gain.

Nonrecaptured § 1231 losses from the seven prior tax years may cause current year net § 1231 gain to be treated as ordinary income.

Personal use property casualty gains and losses are not subject to the § 1231 rules.

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 chart below after all possible netting and reclassification has been completed? What is the taxpayer's adjusted gross income? (Ignore the self-employment tax deduction.)

If a capital asset is sold at a loss, the holding period is important.

A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs, but occasionally bills a customer with payment expected within 30 days.At the end of the year he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above) of $55,000.He also had $3,500 interest income, $200 gambling winnings, and sold corporate stock for $7,000.The stock had been purchased in 2009 for $8,200.Mike is single, has no dependents, and claims the standard deduction.What is his 2012 taxable income? (Ignore the self-employment tax deduction.)

On January 18, 2011, Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11, 2012, she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300.On February 10, 2013, Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2011.On that date, Blue Corporation stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2012? In 2013?

The Code contains two major depreciation recapture provisions-§§ 1245 and 1250.

In 2012 Angela, a single taxpayer with no dependents, disposed of for $44,000 a business building which cost $100,000. $60,000 of depreciation had been taken on the building.Angela has a short-term capital loss of $3,000 this year.She has taxable income (not related to property transactions) of $125,000. She has no § 1231 lookback loss. What is the amount and nature of the gain or loss, what is Angela's taxable income, and what is her tax on the taxable income?

A business machine purchased April 10, 2011, for $62,000 was fully depreciated in 2011 using § 179 immediate expensing. On August 15, 2012, the sole proprietor who owned the machine gave it to his son. On that date, the machine's fair market value was $57,000. The son did not use the machine in business or hold it as inventory and the machine was sold on November 22, 2012, for $53,000.What is the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?