Capital 16. Gains Tax Rates
Solution: a. 0%.
b. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain
exceeding the 15% bracket is taxed at 28%.
c. 15% unless included gains put the taxpayer in a higher tax bracket; then the gain
exceeding the 15% bracket is taxed at 25%.
17. Realized Gain or Loss
Solution: a. ($40,000 + $19,000 - $2,000) - $47,000 = $10,000 realized gain.
b. ($40,000 + $19,000 - $2,000) - $67,000 = $10,000 realized loss.
18. Determination and Character of Gains and Losses
Solution: a. $5,000 + $15,000 + $13,000 = $33,000 amount realized.
b. $33,000 - $34,000 = $1,000 loss.
c. Long-term capital loss.
d. If the property had been used in a business, it would be Section 1231 property
and Allan would have a Section 1231 loss.
21. Determination and Character of Gains and Losses
Solution: a. DDF has $507,000 ($575,000 - $68,000) Section 1231 gain on the land sale. It
has a $635,000 ($125,000 - $760,000) Section 1231 loss on the sale of the
equipment.
b. The $635,000 loss is netted against the $507,000 gain. The result is a $128,000
net Section 1231 loss that is deducted against DDF Corporations ordinary income.
22. Determination and Character of Gain
Solution: $27,000 - $17,000 = $10,000 total gain. $7,000 ($24,000 - $17,000) of the gain is
taxed as ordinary income due to Section 1245 recapture; the remaining $3,000 gain
is Section 1231 gain.
24. Determination and Character of Gains and Losses
Solution: a. $680,000 - $500,000 = $180,000 Section 1231 gain; $150,000 ($650,000 $500,000) of this gain would be unrecaptured Section 1250 gain subject to a
maximum 25% rate.
b. $680,000 - $500,000 = $180,000 Section 1231 gain; $150,000 ($650,000 $500,000) of this gain would be unrecaptured Section 1250 gain subject to a
maximum 25% rate.
c. $30,000 Section 291 recapture ($150,000 x 20%); the remaining $150,000
($180,000 - $30,000) of gain is Section 1231 gain.
25. Determination and Character of Gains and Losses
Solution: a. $19,000 $16,000 = $3,000 long-term capital gain.
b. $30,000 $31,000 = $1,000 short-term capital loss.
26. Section 1231 Recapture
Solution: a. Only $10,000 of the $25,000 of Section 1231 gain must be recaptured as
ordinary income; Barbara deducted a $45,000 Section 1231 loss in year 2, and
$35,000 ($20,000 + $15,000) was recaptured in years 3 and 4. The remaining
$15,000 ($25,000 - $10,000 recaptured) of the gain is simply Section 1231 gain.
b. There is no unrecaptured loss remaining after year 5.
27. Recapture
Solution: a. $700,000 ($600,000 - $80,000) = $180,000 total gain. Only of $80,000 this
gain is subject to Section 291 recapture, however, as that is the limit of Section
1245 recapture if that provision applied. Thus, the Section 291 recapture = 20% x
$80,000 = $16,000. The corporation recognizes $16,000 of ordinary income due to
Section 291 and the remaining $164,000 ($180,000 $16,000) is Section 1231
gain.
b. If Angel were a sole proprietorship, there would be no Section 291 recapture.
The entire $180,000 gain would be Section 1231 gain; however, the $80,000
unrecaptured Section 1250 gain would be subject to the 25% capital gains tax rate
when included in the sole proprietors tax return.
c. If Angel Corporation has $43,000 of Section 1231 losses in the prior year,
$43,000 of the $164,000 Section 1231 gain would be recaptured (under the lookback rules) and included in ordinary income (along with the $16,000 Section 291
recapture). Only the remaining $121,000 ($180,000 - $16,000 - $43,000) is
Section 1231 gain.
32. Capital Asset Netting
Solution: $65,000. Netting the $15,000 STCG with the $24,000 LTCL results in a $9,000
LTCL. Sharon can deduct only $3,000 of this capital loss in the current year; thus,
her adjusted gross income is $65,000 ($68,000 - $3,000). She can carry the
remaining $6,000 LT capital loss forward.
35. Capital Asset and Section 1231 Netting
Solution: Taxable income is reduced by $2,000.
Step 1. Net the $10,000 Section 1231 gain with the $6,000 Section 1231 loss; the
result is a net Section 1231 gain of $4,000.
Step 2. Net the $4,000 Section 1231 gain with the long-term capital gains and
losses; the result is a net $1,000 long-term capital gain ($4,000 + $4,000 - $7,000).
Step 3. The $3,000 short-term capital gain is netted with the $6,000 short-term
capital loss; the result is a net $3,000 short-term capital loss.
Step 4. The $3,000 STCL and $1,000 LTCG are netted; the result is a $2,000
STCL. This loss is deducted from the taxpayers other income, reducing taxable
income by $2,000.
44. Related Party Transaction
Solution: Marilyns basis in the shares sold = $10,000 [(200/500) x $25,000]. She has a
realized loss of $3,000 ($7,000 - $10,000) but she can recognize none of it
because the sale was to her brother. Her basis in her remaining 300 shares is
$15,000 ($25,000 - $10,000 sold).
Her brothers basis in the shares he purchased is the purchase price of $7,000.
When he sells the stock for $12,000, he has a $5,000 realized gain ($12,000 $7,000). He only has to recognize $2,000 of the gain, however, as he can offset
his sisters unrecognized $3,000 loss against his $5,000 gain.