we need to tell the irs what kind of gain we have
we can have ordinary income, capital gain depending of item sold.
long term capital gain are taxed
in a lower tax rate and all other gain are taxed at a higher tax rate .
rule for capital losses after you offset your gains
there is a limitation , are limited up to 3,000 dollars
ordinary income is
all taxed/ no restrictions
for this chapter you need to know if it is ordinary income or capital income for this you need to know
what kind of asset you are selling (capital asset, ordinary asset, 1231 asset),
property disposition: in this class we will focus on sale, but there is also exchange, casualty , theft and condemnation
the holding periods: short term and long term
1221. capital asset is everything except:
1.inventory
2. Notes and accounts receivables acquired from the sale of inventory or performance of services
3.Realty and depreciable property used in a trade or business (�1231 assets)
�1221 defines capital assets as everything except (cont'd)
Certain copyrights; literary, musical, or artistic compositions; or letters, memoranda, or similar property
Certain publications of U.S. government
Supplies of a type regularly used or consumed in the ordinary course of a business
capital assets usually include
Assets held for investment (e.g., stocks, bonds, land)
Personal use assets (e.g., residence, car)
Miscellaneous assets selected by Congress
1231 assets are
any assets that you have to hold on to more than 1 year. this assets have to be for business use. (ex. timber, coal , iron , livestock, unharvested crops, certain purchased intangibles)
Holding period starts
on the day after the property is acquired and includes the day of disposition
1231 assets result in
loss= ordinary loss
gain= long term capital gain
1231 asset depreciation
when you sale your asset you need to recapture your depreciation taken, so you need to recognize your depreciation as income in a 1231 asset. (rule 1245)(1250 recapture for realty property) does not apply to exchanges
recapture deprecciation is treated as
ordinary income
On January 1, 2015, Jake sold for $26,000 a machine acquired several years ago for $24,000. He had taken $20,000 of depreciation on the machine.
Amount Realized $26,000
Adj. Basis-Cost $24,000
Acc. Depr. -20,000 4,000
Realized Gain $22,000
Sec. 1245 - Ord
example ordinary income and long term capital gain
Same as previous example except Jake sold
the machine for $18,000.
Amount Realized $18,000
Adj. Basis-Cost $24,000
Acc. Depr. -20,000 4,000
Realized Gain $14,000
Sec. 1245 - Ordinary Income 14,000
Sec. 1231 Gain $ -0-
2nd example only ordinary income
if you have a loss then
everything is considered an ordinary loss
1. Identify which of the following is a capital asset:
I. A canvas painting of a portrait client, in the painter's hands
II. Depreciable fixtures in a business parking lot
III. Treasury stock
a) II only.
b) II and III only.
c) None of the above.
d) III on
c) Correct! Capital assets are all property held by a taxpayer except property normally included in inventory, such as a canvas portrait of a client in the hands of the painter; depreciable property and real estate used in business, such as depreciable fi
2. On January 15 of the current year Kreutzer, an individual, inherited from Gladstone shares of stock worth $25,000. Gladstone had purchased the shares in June of the previous year for $20,000, and the shares were worth $23,000 at Gladstone's date of dea
a) Correct! The gain or loss on the sale of inherited property is always considered long?term. The basis in inherited property will be equal to the property's fair value at the date of death, unless the alternate valuation date, six months after the date
3. The following facts apply to Collins, an individual:
In February of the current year, Hodge, who had owed a $5,000 personal debt to Collins for the past three years, declared bankruptcy.
Collins sold land used in Collins's business for a $10,000 gain.
b) Correct! A nonbusiness bad debt, resulting when a nonbusiness receivable becomes
uncollectible, results in a short?term capital loss. Hodge's bankruptcy will result in a $5,000 short?term capital loss for Collins. Land used in a business is a section 1
4. In 2016, Colossus Corporation incurred a net capital loss in the amount of $25,000. Colossus had the following net capital gains in the previous five years:
2015: $7,000
2014: $2,000
2013: $5,000
2012: $4,000
2011: $3,000
How much of the 2016 net capit
c) Correct! A corporation may not deduct a capital loss. Instead, it may be carried back to any or all of the preceding three years to be offset against previously taxable capital gains with the remainder carried forward for up to 5 years. Colossus will c
5. The following facts apply to Eliot, an individual, in the current year:
April 1 - Sold shares of stock, purchased on April 1 of the previous year, for a $2,000 gain
May 15 - Sold equipment used in Eliot's business, which had been purchased in July of t
d) Correct! The shares sold on April 1, held for 1 year and 1 day, and the shares sold on July 12, held for more than 1 year, both result in long?term capital gains of $2,000 + $7,000 or $9,000. The equipment sold on May 15 and the equipment sold on Novem
6. In Year 1, Gardner used funds earmarked for use in Gardner's business to make a personal loan to Carson. In Year 3, Carson declared bankruptcy, having paid off only $500 of the loan at that time. In Year 1, Gardner purchased equipment for use in Gardne
d) Correct! The uncollectibility of a personal loan represents a nonbusiness bad debt, which is treated as a short?term capital loss, regardless of the holding period. Depreciable business property held more than one year is � 1231 property and losses on
On March 1 of the current year Reiter, an individual, sold an office building for $300,000 that had an adjusted basis of $220,000, resulting in a gain of $80,000. Reiter had purchased the building for $260,000 on April 1 of the previous year, and $30,000
a) Correct! Depreciable real property is � 1250 property subject to recapture of excess depreciation. However, since the building was held for 1 year or less, it is an ordinary asset and the entire $80,000 gain is ordinary gain.
In year 3 daniels, an individual, sold depreciable equipment for 21,000 that had a n adjustment basis of $12,000, resulting in a $9,000 gain. The property had cost Daniels $20,000 when purchased in Year 1, and $8,000 of MACRS depreciation had been taken.
c) Correct! When � 1231 property is sold at a gain, all depreciation taken, to the extent of the gain, is recaptured, resulting in an ordinary gain. The remainder, if any, is � 1231l gain, Daniels recaptures all $8,000 in depreciation taken as an ordinary
Cowabunga Corp. had a highly profitable Year 4, during which it purchased $1,000,000 in tangible personal property and elected to claim the highest depreciation expense allowed for tax purposes under Code � 179. In Year 6 Cowabunga sells the tangible pers
d) Correct! Depreciable tangible personal property held more than one year is � 1231 property and is subject to � 1245 depreciation recapture of all depreciation taken. With an original cost of $1,000,000 and an adjusted basis of $200,000, a total of $800
33. (LO 9)
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 depreciation take
32. (lo 9)
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 gain due t
when you sell a 1031 asset at a los the loss is always an
ordinary loss
section 1231 property generally does not include accounts receivable arising in the ordinary course of business
true
false
true
for 1245 recapture to apply , accelerated depreciation must have been taken on the property
false