1)Upon the sale or other disposition of property, what four questions should be considered for income tax purposes?
(LO 1)
�Is there a realized gain or loss?
�If so, is the realized gain or loss recognized?
�If the realized gain or loss is recognized, is it classified as ordinary or capital?
�What is the basis of replacement property, if any, that is acquired?
2)Ivan invests in land, and Grace invests in taxable bonds. The land appreciates by $8,000 each year, and the bonds can earn interest of $8,000 each year. After holding the land and bonds for five years, Ivan and Grace sell them. There is a $40,000 realiz
(LO 1) Over the five-year period, the results for Ivan and Grace are the same (i.e., recognized gain of $40,000). However, the timing of the recognition of the gain differs. Grace will include the interest income of $8,000 in her gross income for each of
3)Carol and Dave each purchase 100 shares of stock of Burgundy, Inc., a publically owned corporation, in July for $10,000 each. Carol sells her stock on December 21 for $8,000. Because Burgundy's stock is listed on a national exchange, Dave is able to asc
(LO 1) Although the stock owned by Carol and by Dave decreases in value by $2,000, only Carol has a realized and recognized loss of $2,000. The key factor in determining whether a disposition has taken place usually is whether an identifiable event has oc
4)If a taxpayer sells property for cash, the amount realized consists of the net proceeds from the sale. For each of the following, indicate the effect on the amount realized:
a.The property is sold on credit.
b.A mortgage on the property is assumed by th
(LO 1)
a.Whether the property is sold for cash or on credit is not relevant for this purpose. The amount realized includes both the cash received at the time of sale and the cash to be received in the future (i.e., the payments made by the debtor).
b.The
5)Taylor is negotiating to buy some land. Under the first option, Taylor will give Ella $150,000 and assume her mortgage on the land for $100,000. Under the second option, Taylor will give Ella $250,000, and she will immediately pay off the mortgage. Tayl
(LO 1) Under the first option, the basis for the land consists of the sum of the cash paid by Taylor ($150,000) and the mortgage on the land ($100,000) that Taylor would assume. The basis under the second option is the $250,000 paid by Taylor. Therefore,
6)Marge owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market value of $250,000. The property is subject to a mortgage of $400,000. Because Marge is in arrears on the mortgage payments, the creditor is willing
(LO 1)
a.One factor that could contribute to this result is that mortgages are granted based on the fair market value of the property rather than on the taxpayer's adjusted basis for the property. Another factor is that depreciation deductions in the earl
7)On July 16, 2016, Logan acquires land and a building for $500,000 to use in his sole proprietorship. Of the purchase price, $400,000 is allocated to the building, and $100,000 is allocated in the land. Cost recovery of $4,708 is deducted in 2016 for the
(LO 1)
a.Logan's adjusted basis at acquisition date is the cost of the land and building.
Land $100,000
Building 400,000
b. His adjusted basis at the end of 2016 is:
Land $100,000
Building ($400,000 ? $4,708) 395,292
Depreciation is a capital recovery.
8)Auralia owns stock in Orange Corporation and Blue Corporation. She receives a $10,000 distribution from both corporations. The instructions from Orange state that the $10,000 is a dividend. The instructions from blue state that the $10,000 is not a divi
(LO 1) Dividend treatment will result only if the corporation has adequate earnings and profits to cover the amount of the distribution. Any excess of the amount of the distribution over the earnings and profits will be treated as a recovery of capital. I
9)Wanda is considering selling two personal use assets that she owns. One has appreciated in value by $20,000, and the other has declined in value by $17,000. Wanda believes that she should sell both assets in the same tax year so that the loss of $17,000
(LO 2)
a.Wanda's impression of the tax consequences is wrong. The sale of the appreciated personal use asset will result in a $20,000 recognized gain. As losses on the sale of personal use assets are disallowed, the sale of the personal use asset that pro
10)Ron sold his sailboat for a $5,000 loss in the current year because he was diagnosed with skin cancer. His spouse wants him to sell his Harley-Davidson motorcycle because her brother broke his leg while riding his motorcycle. Because Ron no longer has
(LO 2) Both assets are personal use assets. Therefore, gains are recognized and losses are not recognized. Ron may think that if he sells both assets this year, he can net the gain and loss. Unfortunately, this is not permitted. By accepting Jeff's offer,
11)Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or sell it and give Fred the proceeds. If Fred receives the stock, he will sell it to obtain the proceeds. Simon is in the 15% tax
(LO 1, 2, 3, 5) On the surface, it appears that Simon should give the stock to Fred and let Fred sell it, because Fred is in the higher tax bracket (i.e., 25% versus Simon's 15%; the loss in Fred's hands would generate more tax savings). However, for gift
12)Robert inherits 1,000 shares of Wal-Mart stock from her aunt in 2016. According to the information received from the executor of her aunt's estate, Robin's adjusted basis for the stock is $55,000. Albert, Robins fianc�, receives 1,000 shares of Wal-Mar
(LO 3) For property received by gift, there is a carryover basis (i.e., same as the donor's basis plus gift tax paid on any appreciation). If no gift tax is paid, then Albert's adjusted basis is the $7,000.
For inherited property, the basis is a new basis
13)Thelma inherited land from Sadie on June 7, 2016. The land appreciated in value by 100% during the six months it was owned by Sadie. The value has remained stable during the three months Thelma has owned it, and she expects it to continue to do so in t
(LO 3) If Thelma received the land as a gift from Sadie, her holding period would include not only her own holding period but also that of Sadie. Thus, if the land had been received by gift, Thelma's holding period would not be long term (i.e., six months
14)Marilyn owns land that she acquired three years ago as an investment for $250,000. Because the land has appreciated in value as she anticipated, she sells it to her brother, Amos, for its for its fair market value of $180,000. Amos sells the land two y
(LO 4)
a.Marilyn's realized loss is $70,000 ($180,000 amount realized ? $250,000 adjusted basis). However, because her brother Amos is a related party under � 267, none of the $70,000 realized loss is recognized.
b.Amos has a realized gain of $60,000 on t
15)Comment on the following transactions:
a.Mort owns 500 shares of Pear, Inc. stock with an adjusted basis of $22,000. On July 28,2016, he sells 100 shares of $3,000. On August 16,2016, he purchases another 100 shares for $3,400. Mort's realized loss of
(LO 4, 5)
a. Because the purchase of the 100 shares of Pear stock on August 16 is within 30 days of the sale of the 100 shares of Pear, the transaction is a wash sale. Therefore, Mort's realized loss of $1,400 ($3,000 amount realized ? $4,400 adjusted bas
16)Sally owns real property for which that annual property taxes are $9,000. She sells the property to Shelley on March 1 for $550,000. Shelley pays the real property taxes for the entire year on October 1.
a.How much of the property taxes can be deducted
(LO 1)
a.The real property taxes must be apportioned between Sally and Shelley as follows:
Sally: 2/12 ? $9,000 = $1,500
Shelley: 10/12 ? $9,000 = $7,500
Property taxes are deducted $1,500 by Sally and $7,500 by Shelley.
b.Even though Shelley paid the rea
17)Melba purchases land from Adrian. Melba gives Adrian $225,000 in cash and agrees to pay Adrian and additional $400,000 one year later plus interest at 5%/
a.What is Melba's adjusted basis for the land at the acquisition date?
b.What is Melba's adjusted
(LO 1)
a.Melba's basis is the cost of $625,000 ($225,000 + $400,000). Whether the full acquisition price is paid in cash is not relevant.
b.Melba's basis for the land remains at $625,000. The interest paid does not affect the adjusted basis.
18)On July 1,2016, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 6%. The market rate of interest is 2%.
a.How much interest income and/or interest expense must Katri
(LO 1)
a. Amortization of bond premium and the related basis adjustment are mandatory for tax-exempt bonds. However, because the bonds are tax-exempt, the interest income of $2,250 ($75,000 ? 6% ? 1/2) is not included in gross income. Likewise, the intere
19)Luciana, a nonshareholder, purchases a condominium from her employer for $85,000. The fair market value of the condominium is $120,000. What is Luciana's basis in the condominium and the amount of any income as a result of this purchase?
(LO 3) The basis of property is generally the property's cost. A bargain purchase of property is an exception to the general rule for determining basis. A bargain purchase may result when an employer transfers property to an employee at less than the prop
20)Sebastian purchases two pieces of equipment for $100,000. Appraisals of the equipment indicate that the fair market value of the first piece of equipment is $72,000 and that of the second piece of equipment is $108,000. What is Sebastian's basis in the
(LO 3) The lump-sum cost is allocated on the basis of the fair market values of the individual assets acquired.
Sebastian's basis for the first piece of equipment is $40,000 [$72,000/($72,000 + $108,000) ? $100,000], and his basis for the second piece of
21)Heather owns 400 shares of Diego Corporation common stock for which she paid $4,000. She receives a nontaxable stock dividend for 20 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stoc
(LO 3) In the case of nontaxable stock dividends, the allocation depends on whether the dividend is a common stock dividend on common stock or a preferred stock dividend on common stock. If the stock dividend is common on common, the cost of the original
22)Juliana purchased land in 2013 for $50,000. She gave the land to Tom, her brother, in 2016, when the fair market value was $70,000. No gift tax is paid on the transfer. Tom subsequently sells the property for $63,000.
a.What is Tom's basis in the land,
(LO 3)
a.Property received by gift can be referred to as dual basis property; that is, the basis for gain and the basis for loss might not be the same amount. In general, the donee's basis is equal to the donor's adjusted basis (a carryover basis). If the
23)Ashely inherited all of the property of her aunt, who died in 2016. Her aunt's adjusted basis for the property at the date of death was $1,200,000. The property's fair market value was $4,500,000 at the date of death and $4,800,000 six months after the
(LO 3) The basis of property acquired from a decedent is generally the property's fair market value at the date of death (referred to as the primary valuation amount). The property's basis is the fair market value six months after the date of death if the
24)Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000.
a.What is Lisa's realized and recognized gain or loss?
b.What is Alfred's recognized gain or loss if he subsequently sells the pr
(LO 4)
a.Section 267 provides that realized losses from sales or exchanges of property, directly or indirectly, between certain related parties are not recognized. This loss disallowance provision applies to several types of related-party transactions. Th
25)Juan owed 200 shares of Circle Corporation stock (adjusted basis of $30,000). He sold 100 shares for $12,000. Twenty days later he purchased 100 Shares of the same stock for $8,500. What is Juan's realized and recognized loss? What is his basis in the
(LO 4) Section 1091 stipulates that in certain cases, a realized loss on the sale or exchange of stock or securities is not recognized. Specifically, if a taxpayer sells or exchanges stock or securities and within 30 days before or after the date of the s
26)Arianna's personal residence has an adjusted basis $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna's gain basis? What is her loss basis?
(LO 4) The original basis for loss on personal use assets converted to business or income-producing use is the lower of the property's adjusted basis or fair market value on the date of conversion. The gain basis for converted property is the property's a
27)Peyton sells an office building and the associated land on May 1, 2016. Under the terms of the sale contract, Peyton is to receive $1,600,000 in cash. The purchaser is to assume Peyton's mortgage of $950,000 on the property. To enable the purchaser to
(LO 4) The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of other property received. The amount realized also includes any real property taxes treated as imposed on the seller that