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CHAPTER 17—PROPERTY TRANSACTIONS: DISPOSITIONS OF TRADE OR BUSINESS PROPERTY TRUE/FALSE 1. Both land and a building used as rental property and held for more than one year are § 1231 assets. ANS: T Section 1231 assets include depreciable property and land used in a trade or business or rental activity. PTS: 1 REF: p. 17-3 2. The portion of the gain on the sale of timber that qualifies for § 1231 treatment is only the difference between the fair market value at the beginning of the tax year of harvest and the adjusted basis of the timber. ANS: T Any increase in the value from the beginning of the year of harvest is ordinary income, related to the harvesting. PTS: 1 REF: Example 1, pp. 17-5 and 17-6 and § 631 3. Unharvested crops sold along with land do not qualify for § 1231 treatment, and therefore produce or- dinary income at the time of the sale. ANS: F Unharvested crops will be treated as part of the § 1231 asset (i.e., the land). PTS: 1 REF: pp. 17-5 and 17-6 and § 1231(b)(4) 4. The long-term holding period under § 1231 for cattle and horses is 12 months; for other livestock, 24 months. ANS: F Special rules apply to the actual holding period of cattle and horses, and the actual holding periods are reversed in the question. The holding period for cattle and horses is 24 months, and for other livestock (excluding poultry) is 12 months. PTS: 1 REF: p. 17-6 and § 1231(b)(3) 5. Three rental houses held by a person who earns her living as a physician are not § 1231 property since the activity does not constitute a trade or business. ANS: F Even though rental activities are generally not considered an active trade or business, for purposes of § 1231 the assets generally are trade or business properties. PTS: 1 REF: p. 17-4 6. The gain or loss on the disposition of a machine used in a trade or business for one year or less is a short-term capital gain or loss.
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ANS: F This gain or loss would be ordinary in nature. The asset is excluded from the definition of capital as- sets and is not § 1231 property since it was not held more than one year. PTS: 1 REF: pp. 17-3 and 17-4 and §§ 1221 and 1231(a) 7. As part of the § 1231 netting process, casualty and theft gains and losses involving business capital as- sets and § 1231 assets are combined. If a net gain results, each casualty or theft is treated separately as a casualty gain or loss. ANS: F If a net gain results, the net gain is treated as a § 1231 gain and goes on to the next step in the netting process. PTS: 1 REF: Exhibit 17-1 and pp. 17-7 through 17-13 8. If the § 1231 netting process results in a loss, the taxpayer must look back to the prior five years to see if any net § 1231 gains were reported in those years. ANS: F
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