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Exam 8: Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

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Question 21

Multiple Choice

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Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley?

A) The restaurant's tables and chairs.
B) A portable sound system used to play "theme music" for the restaurant.
C) The restaurant building that is an asset of the sole proprietorship.
D) An interest-bearing savings account used to keep the restaurant's excess cash.
E) None of the above.

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

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Question 22

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Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill) that are eligible for amortization and held for more than one year.

A) True
B) False

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Question 23

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Which of the following would extinguish the § 1245 recapture potential?

Carol had the following transactions during 2016: a painting held for two years and sold at a gain of $85,000; 100 shares of Gray stock held six months and sold for a loss of $6,000; 50 shares of Yellow stock held 18 months and sold for a gain of $36,000. Carol also had $264,000 of taxable income from other sources than these property transactions. What is Carol's net capital gain or loss and what is her taxable income?

Assume a building is subject to § 1250 depreciation recapture because § 168(k) was used. The building is destroyed in a hurricane and this is the taxpayer's only casualty or theft for the year. In which of the following situations could there be a § 1250 depreciation recapture gain?

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

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

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.

"Collectibles" held long-term and sold at a gain are subject to maximum tax rate of 28%. An individual taxpayer recently sold an antique car for $40,000. The car had been held for several years and $30,000 was originally paid for it. Explain why the car is or is not a collectible.

Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?

A business taxpayer sells inventory for $80,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:

Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.

Betty, a single taxpayer with no dependents, has the gains and losses shown below. Before considering these transactions, Betty has $45,000 of other taxable income. What is the treatment of the gains and losses and what is Betty's taxable income?

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

A worthless security had a holding period of 6 months when it became worthless on December 10, 2016. The investor who had owned the security had a basis of $20,000 for it. Which of the following statements is correct?

The following assets in Jack's business were sold in 2016: ​ The office equipment had a zero adjusted basis and was purchased for $8,000. 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 2016 (the year of sale) , Jack should report what amount of net capital gain and net ordinary income?

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless. The taxpayer is single and the loss is $30,000. The loss is treated as an ordinary loss.

Since the Code section that defines "capital asset" says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.