1)Harriet, an organic farmer, has owned depreciable farm equipment for several years. Is the equipment a capital asset? Why or why not?
(LO 1, 2) Harriet first must determine whether these assets were used in a business. Because Harriet is a farmer, the assumption seems reasonable that she is in the business of farming. Consequently, the depreciable farm equipment is not a capital asset b
2)If there is a net loss from the sale of depreciable business property held long term, what is the character of the loss? How is it deducted (for or from AGI)?
(LO 1) The loss is a � 1231 net loss, and it is treated as an ordinary loss. It is deducted for adjusted gross income.
3)Bernice, a sole proprietor, sold two business assets during the year. As a result, she has an ordinary loss of a 1231 gain. The loss asset was office furniture that was held for eight months, and the gain asset is land that was held for five years. Why
(LO 1, 2) The ordinary loss is from an ordinary asset because the asset was not held more than a year. Such losses do not offset � 1231 gains. The � 1231 gain is treated as a long-term capital gain, and the ordinary loss is a deduction for AGI.
4)Hakim's rental building was not insured when it was destroyed by a hurricane. His adjusted basis for the building was substantial, but was less than he had paid for the building in 2012. The building was Hakim's only asset that was damaged by the hurric
(LO 1, 2) Hakim's rental building was a � 1231 asset. Hakim has a casualty loss equal to the adjusted basis of the building. Because this is his only casualty gain or loss, the loss is an ordinary deduction for AGI.
5)An individual taxpayer had a net 1231 loss in 2016. Could any of this loss be treated as a long-term capital loss? Why or why not?
(LO 2) None of the net � 1231 loss can be treated as a long-term capital loss because such losses are ordinary losses deductible for AGI.
6)Steven established a sole proprietorship in 2011. He sold 1231 assets at a loss in 2014 and 2015. He had only sold 1231 assets at a gain before 2014. In 2016, he could sell a 1231 asset at a gain and would like to have the gain taxed as a long-term capi
(LO 2) Steven has a � 1231 lookback loss from 2014 and 2015 that will convert any 2016 net � 1231 gain into ordinary gain to the extent of the � 1231 lookback loss. In addition, if the property sold in 2016 is subject to � 1245 depreciation recapture (dep
7)Review Examples 4 and 6 in the text. In both examples, the taxpayer's AGI is $129,400 even though in example 6 there is $700 of nonrecaptured 1231 loss from 2015. Explain why the two AGI amounts are the same.
(LO 2) In both Examples 4 and 6, the taxpayer's adjusted gross income is $129,400 because there is no difference in the amount of gains and losses that are present. The $700 of nonrecaptured � 1231 loss from 2015 is only used to recharacterize part of the
8)A depreciable business dump truck has been owned for four years and is no longer useful to the taxpayer. What would have to be true for the disposition of the dump truck to generate at least some 1231 loss?
(LO 3) The dump truck would have to be sold for less than its adjusted basis.
9)If depreciable equipment used in a business is sold at a recognized gain on July 10, 2016, and it was purchased on August 21,2015 does 1245 depreciation recapture apply to the asset? Explain.
(LO 1, 3) Section 1245 depreciation recapture generally applies to � 1231 assets�in this case, depreciable equipment held more than one year. This asset was held one year or less, so it was an ordinary asset rather than a � 1231 asset. Because the asset i
10)A professional football player's contract is sold at a gain after it has been held for two years. What issues should the team consider in determining the nature of this gain?
(LO 3) The team should consider the following issues:
�The holding period of the contract.
�The amortization of the contract.
�The fact that the amortization is subject to � 1245 depreciation recapture.
�Whether the gain exceeds this � 1245 depreciation r
11)A retailer's store is destroyed by a tornado, but is insured for its replacement cost. Consequently, the retailer has a $40,000 gain after receiving the insurance proceeds. The store is not replaced because the retailer spends the insurance proceeds on
(LO 3) The gain is all � 1231 gain.
12)In the current year, an individual taxpayer has net long-term capital gain from disposition of capital assets and has recaptured 1250 gain. What would the circumstances have to be for the recaptured 1250 gain to be taxed at 25%?
(LO 4) Assuming that the unrecaptured � 1250 gain is also the � 1231 gain that is treated as a LTCG, the taxpayer would have to have regular taxable income that puts him or her above the 15% bracket.
13)Mary receives tangible personal property as a gift. The property was depreciated by the donor, and Mary will also depreciate it. At the date of the gift, the property was worth more than the donor's adjusted basis. What is the impact of these facts on
(LO 3, 5) Because the donor had depreciated this tangible personal property, the � 1245 depreciation recapture carries over to Mary. Mary adds to this potential depreciation recapture the depreciation she takes on the property.
14)Thomas receives tangible personal property as an inheritance from a descendant who died in 2016. The property was depreciated by the deceased, and Thomas will also depreciate it. At the date of the deceased's death, the property was worth more than the
(LO 3, 5) The � 1245 depreciation recapture potential associated with the deceased is extinguished when the deceased dies. However, new � 1245 depreciation recapture potential is created as Thomas depreciates the asset.
15)Dino contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value greater than its adjusted basis, but less than the original cost. What is th
(LO 3, 5) The charitable contribution deduction is reduced to the extent there is a potential � 1245 depreciation recapture on the donated property. In effect, the charitable contribution is limited to the adjusted basis of such appreciated property.
16)A corporation distributes a truck it has owned for three years to its sole shareholder. The shareholder will use the truck for personal use activity. The truck's fair market value at the time of the distribution is greater than its adjusted basis, but
(LO 3, 5) The distribution of the truck is a taxable transaction for the corporation to the extent of the excess of the fair market value of the truck over the adjusted basis. All of the gain is � 1245 gain because the truck is a � 1231 asset and the fair
17)A corporation distributes a truck it has owned for three years to its sole shareholder. The shareholder will use the truck for business activity. The truck's fair market value at the time of the distribution is greater than its adjusted basis, but less
(LO 6) The distribution of the truck is a taxable transaction for the corporation to the extent of the excess of the fair market value of the truck over the adjusted basis. All of the gain is ordinary gain due to � 1239 because the shareholder is a relate
18)Complete the following statements regarding special recapture provisions.
a.Corporations selling depreciable real property are required to recapture as ordinary income the _________ of two amounts: (1) _________% of the recognized gain or (2) _________
(LO 6)
a.Corporations selling depreciable real property are required to recapture as ordinary income the lesser of two amounts: (1) 100% of the recognized gain or (2) 100% of the depreciation taken.
b.When the sale or exchange of property, which in the ha
19)Refer to Form 4797 near the end of this chapter. Where would a 1231 loss be entered on the form?
(LO 7) The � 1231 loss is entered in Part I, line 2.
20)Refer to Form 4797 near the end of this chapter. Where would a 1231 gain on the disposition of business land be entered on the form?
(LO 7) The � 1231 gain from the sale of land goes in Part I, line 2. It does not go in Part III because there was no depreciation on the land.
21)Lena is a sole proprietor. In April of this year, she sold equipment purchased four years ago for $26,000 with an adjusted basis of $15,500 for $17,000. Later in the year, Lena sold another piece of equipment purchased two years ago with an adjusted ba
(LO 1) Lena has an ordinary gain (due to � 1245 depreciation recapture) of $1,500 ($17,000 ? $15,500) from the sale of the first equipment and a � 1231 loss of $2,700 ($5,500 ? $8,200) from the sale of the second equipment.
22)Several years ago, Nicolas, a timber dealer, purchased a tract of land with a substantial stand of trees on it. The land cost $8,000 and the timber cost $250,000. On the first day of 2016, the timber was appraised at $325,000. In august 2016, Nicolas c
(LO 2) Nicolas has � 1231 gain of $75,000 ($325,000 first day of the year of disposition value ? $250,000 adjusted basis) and $35,000 of ordinary gain ($360,000 selling price ? $325,000 first day of the year of disposition value).
23)Renata Corporation purchased equipment in 2014 for $180,000 and has taken $83,000 of regular MACRS depreciation. Renata Corporation sells the equipment in 2016 for $110,000. What is the amount and character of Renata's gain or loss?
(LO 3) Renata's equipment gain is subject to � 1245 depreciation recapture. The property had an adjusted basis of $97,000 ($180,000 cost ? $83,000 depreciation). The gain is $13,000 ($110,000 selling price ? $97,000 adjusted basis) and is all ordinary gai
24)Jacob purchased business equipment for $56,000 in 2013 and has taken $35,000 of regular MACRS depreciation. Jacob sells the equipment in 2016for $26,000. What is the amount and character of Jacob's gain or loss?
(LO 3) Jacob has a $5,000 ordinary gain due to � 1245 depreciation recapture because the property's $21,000 adjusted basis ($56,000 cost ? $35,000 depreciation) is less than the selling price of $26,000 and the gain is less than or equal to the depreciati
25)Sissie owns two items of business equipment. Both were purchased in 2012 for $100,000, both have a 7-year MACRS recovery period, and both have an adjusted basis of $37,490. Sissie is considering selling these assets in 2016. One of the items is worth $
(LO 1, 2, 3) To handle this transaction properly, Sissie must determine the following:
�The tax status of the property (� 1231 asset, capital asset, or ordinary asset).
�The applicability of � 1245 depreciation recapture.
�The outcome of the � 1231 nettin
26)An apartment building was acquired in 2007. The depreciation taken on the building was $123,000, and the building was sold for a $34,000 gain. What is the maximum amount of 25% gain?
(LO 4) The maximum amount of unrecaptured � 1250 gain is equal to the depreciation taken on the property or the gain from disposition, whichever is lower. Because the gain ($34,000) is less than the depreciation taken ($123,000), the maximum amount of unr
27)An individual taxpayer has a $25,000 of 1231 gain from the disposition of non-residential real estate. Straight-line depreciation of $43,000 was deducted on real estate. The taxpayer also has a 1231 loss of $56,000 from the sale of equipment. How much
(LO 4) None of the gain is taxed as unrecaptured � 1250 gain because there is a net � 1231 loss for the year of $31,000 ($25,000 nonresidential real estate gain less $56,000 equipment loss). A � 1231 loss resulting from the disposition of other � 1231 ass
28)Enzo is a single taxpayer with the following gains and losses for 2016:
a.$2,100 short term capital loss.
b.$24,000 long-term capital gain from sale of stock.
c.$14,000 1231 gain that is all unrecaptured 1250 gain.
(LO 4) The $2,100 short-term capital loss first offsets the unrecaptured � 1250 gain, reducing it to $11,900. The total long-term capital gain is $35,900 ($24,000 + $11,900), and it is potential $11,900 25% rate gain and $24,000 0%/15%/20% rate gain.
29)In a 1031 like-kind exchange, Rafeal exchanges a piece of equipment that originally cost $200,000. On the date of the exchange, the equipment given up has an adjusted basis of $85,000 and a fair market value of $110,000. Rafeal pays $15,000 and receive
(LO 5) Rafael has no recognized gain or loss. There was a realized gain of $25,000 ($110,000 value ? $85,000 adjusted basis) on the property relinquished, but because no boot was received, none of the gain is recognized. However, the � 1245 depreciation r
30)Gaston Corporation distributes 1245 property as a dividend to its shareholders. The property's fair market value is $580,000, and the adjusted basis is $560,000. In addition, the amount of the recapture potential is $55,000. What is the amount and char
(LO 5) Gaston must recognize $20,000 of � 1245 depreciation recapture gain. The gain is less than or equal to the depreciation taken.