FTax IRGTB ch17 p001-014

FTax IRGTB ch17 p001-014 - 17 Property Transactions:...

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Unformatted text preview: 17 Property Transactions: Dispositions of Trade or Business Property Solutions to Tax Research Problems 17-58 The research question is: decide whether the fact that the grandmother used the residence for personal purposes is relevant in determining the character of the property to the heir, R. If the grandmother's use of the property does determine the property's character for R, then R has a nondeductible loss on the sale of a personal-use asset. Otherwise, R has a 1231 asset, the loss on which qualifies for favorable ordinary deduction treatment. Based on the cited cases, the character of property in the hands of its owner is determined on the basis of how he or she uses it. The use by a prior owner, even a deceased benefactor, is not considered. R is, therefore, able to treat the loss as a 1231 loss; and, since she has no other 1231 transactions or capital asset transactions, deduct it as an ordinary deduction. Campbell, 5 T.C. 272 (1945), involved a taxpayer who inherited a residence from a parent. The taxpayer never occupied the home but offered it for sale or rent. It was never rented before being sold, and the court determined that it was sold, in a "transaction entered into for profit." Crawford, 16 T.C. 678 (1951), dealt with a taxpayer who inherited most of a personal residence from her husband. She vacated the premises immediately and offered it for rent, and later purchased the remaining interest. Even though the property never rented, she held the property for income-producing purposes. a. b. c. MACRS, and a 27.5-year life was required in 1989. Depreciation: Cost assignable to building $120,000 80% $96,000. Cost assignable to office $96,000 20% 19,200. Depreciation for 15 years $19,200 15 / 27.5 $10,473 (for 15 years and 1 month = $10,531). No, there is no Section 1250 recapture if the required straight line method is used. All of J's gain is excludable except any depreciation since 1996 (123.5 months depreciation $7,815) must be recaptured. The character of the gain is 25% gain. 5- 17-59 17-1 17 Property Transactions: Dispositions of Trade or Business Property Test Bank True or False 1. Both land and a building used as rental property and held for more than one year are 1231 assets. 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. 3. Unharvested crops sold along with land do not qualify for 1231 treatment, and therefore produce ordinary income at the time of the sale. 4. The long-term holding period under 1231 for cattle and horses is 12 months; for other livestock, 24 months. 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. 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. 7. As part of the 1231 netting process, casualty and theft gains and losses involving business capital assets and 1231 assets are combined. If a net gain results, each casualty or theft is treated separately as a casualty gain or loss. 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. 9. If 1245 property is sold on the installment basis, any depreciation recapture must be reported in the year of sale, even if the amount of money collected in that year is less than the recaptured amount. 10. L sold a machine that had cost $6,000 during the current year for $3,200. The machine was used in her business for 21 months and was expensed under 179. L must report ordinary income, rather than potential capital gain, of $3,200. 17-3 17-4 Chapter 17 Property Transactions: Dispositions of Trade or Business Property 11. W sold an automobile that had been used in his business during the current year. Depreciation of $6,700 had been claimed. If the straight line method had been used, the depreciation expense would have been $4,500. W's 1245 recapture potential is $2,200. During the current year, Q sold a desk used in her business. The gain realized was $50 and the 1245 recapture potential was $375. Q has ordinary gain of $50 and 1231 gain of $325. During the current year, X sold an office building that was purchased before 1981 and had been used in his business. Depreciation of $12,700 had been claimed. If the straight line method had been used, the depreciation expense would have been $8,500. W's 1250 recapture potential is $4,200. Nonresidential real property acquired during the years 1981 through 1986 is classified as 1245 property if the taxpayer used the accelerated method of recovering cost. There is never any depreciation recapture on the sale of an asset when it is sold at a loss. As a general rule, 1245 (i.e., the full recapture rule) applies to depreciable personalty but not realty. As a general rule, 1250 (i.e., the partial recapture rule) applies to depreciable personalty but not realty. In order for there to be depreciation recapture under either 1245 or 1250, the property must be held more than one year. Section 1245 is referred to as the full recapture rule since all of the gain may be ordinary income. Section 1250 is referred to as the partial recapture rule since only a portion of the depreciation allowed may be recaptured. W sold some office furniture at a gain that was partly ordinary income and partly 1231 gain. W sold the furniture for more than its original cost. X sold a rental house at a small loss. The loss is a 1250 loss. Y sold a partially depreciated office building at a gain, all of which was 1231 gain. The building was depreciated using an accelerated method. Z sold an office building at a gain, all of which was unrecaptured 1250 gain. The building was sold for its original purchase price or less. If straight-line depreciation is used by an individual for real estate, no 1250 recapture will be recognized if the property is sold at a gain. The additional depreciation recapture for a corporation under 291 is 20 percent of the 1231 gain. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Multiple Choice 27. Which one of the following is not generally considered 1231 property? a. b. c. d. Land held 13 months and used in a trade or business as a parking lot Crops growing on farm land held 20 years Cattle held 12 months and used in ranching Equipment used in a printing business and held 15 months Test Bank 17-5 28. H sold several business properties that were 1231 property during the current year. His overall gain was $32,000 and he had depreciation recapture of $12,500. The only other 1231 transactions H has had were in the two prior years. He had a net gain of $3,500 two years ago and a net loss of $12,000 last year. How are H's gains for the current year treated? a. b. c. d. $12,500 ordinary gain; $19,500 long-term capital gain $21,000 ordinary gain; $11,000 long-term capital gain $24,500 ordinary gain; $ 7,500 long-term capital gain $32,000 ordinary gain 29. Y suffered a theft of depreciable assets that were held for two years for use in her business. The assets were worth $1,000 and had a basis of $1,200. Y's only other property transaction resulted in a shortterm capital loss of $2,500. What is the impact on Y's adjusted gross income? a. b. c. d. $0 $3,700 reduction $3,000 reduction $3,500 reduction 30. R realized a gain of $10,000 on a fire that destroyed part of a warehouse. R also sold several assets during the current taxable year as follows: Business use equipment held three years Investment land held 15 years Travel trailer used for personal trips $ 3,000 gain 12,000 gain 4,000 loss, The depreciation allowed on the equipment was $6,500 and was calculated using the straight line method. Assuming R's taxable income is $70,000 before these transactions, what is his taxable income for the year (assuming these items do not affect any other deductions)? a. b. c. d. 31. $95,000, $25,000 of which is long-term capital gain $91,000, $18,000 of which is long-term capital gain $95,000, $22,000 of which is long-term capital gain $95,000, $12,000 of which is long-term capital gain G sold a file cabinet used in her business for $250. She had purchased it for $400 and deducted depreciation of $220. What is the amount and character of G's gain or loss recognized on this sale? a. b. c. d. $70 ordinary income $70 1231 gain $150 1231 loss $220 ordinary income and $150 1231 loss 32. Which of the following is not true of depreciation recapture under 1245? a. b. c. d. In involuntary conversions and like-kind exchanges, depreciation recapture is limited to the gain recognized. The recapture potential generally is the amount of additional depreciation. Any gain recognized is ordinary income to the extent of the recapture potential. Recapture from installment sales must be reported in the year of the sale, regardless of whether or not any sales proceeds are collected in that year. 17-6 Chapter 17 Property Transactions: Dispositions of Trade or Business Property 33. N purchased a camera for use in his photography business for $1,200. Depreciation of $624 was allowed as a business deduction before the camera was sold. Which of the following is not true? a. b. c. d. If the camera is sold for $550, 1231 applies to the loss. If the camera is sold for $1,000, 1231 applies to the gain. If the camera is sold for $1,300, 1245 and 1231 apply to the gain. All are true. 34. Five years ago, Wilson James purchased a photocopier with a five-year recovery period for use in his business for $8,000. He deducted depreciation totaling $7,078 in the five years. In the current year, after owning and using the machine 58 months, James sold it for $1,122. What are the amounts of his depreciation recapture and 1231 gain, respectively? a. b. c. d. $200; $0 $0; $200 $0; $0 $100; $100 35. C sold a house held for rental purposes for $40,000, recognizing 1250 recapture of $3,000 and 1231 gain of $5,000. Which of the following is not necessarily true? a. b. c. d. The basis of the property was $32,000. The depreciation allowed was $3,000 greater than straight-line depreciation would have been. The total depreciation allowed was $8,000. None of the above statements is necessarily true from these limited facts. 36. During the year, V sold an apartment purchased in 1980. Assume that V claimed all depreciation allowed. The sale is summarized as follows: Accelerated Depreciation Allowed $ 2,800 35,000 n/a Alternate Straight-line Depreciation $ 2,500 31,000 n/a Furniture and appliances Building and improvements Land Sales Price $ 1,400 90,000 10,000 Cost $ -3,200 80,000 7,000 How much ordinary income does V have under 1245 and 1250, respectively? a. b. c. d. 37. $300 and $0 $300 and $4,000 $1,000 and $0 $1,000 and $4,000 During the year, V sold an apartment purchased in 1980. Assume that V claimed all depreciation allowed. The sale is summarized as follows: Accelerated Depreciation Allowed $ 1,800 35,000 n/a Alternate Straight-line Depreciation $ 1,500 31,000 n/a Furniture and appliances Building and improvements Land What is V's 1231 gain? a. b. c. d. $44,000 $45,000 $48,000 $49,000 Sales Price $ 2,400 90,000 10,000 Cost $ 3,200 80,000 7,000 Test Bank 17-7 38. The gains and losses from sales of capital assets for the current year by G are summarized as follows: Long-term gains Short-term gains Short-term losses $ 3,000 1,000 (8,000) G has 1245 recapture of $1,500 from one transaction and a 1231 loss of $1,000 from another. The net decrease in A.G.I. from these transactions is a. b. c. d. 39. $0 $2,500 $3,000 $3,500 The gains and losses from sales of capital assets for the current year by H are summarized as follows: Long-term gains Short-term gains Short-term losses $ 3,000 3,000 (1,800) Assuming H has a net 1231 gain of $1,600 and depreciation recapture of $2,000, what is the increase in his A.G.I., if any, from these transactions? a. b. c. d. 40. $2,000 $5,800 $9,600 $7,800 Which of the following is statements is false regarding depreciation recapture under 1250? a. b. c. d. Depreciation recapture that existed at the death of the taxpayer carries over to the beneficiaries. Recapture is generally not required upon the gift of 1250 property. In nontaxable transactions that do not trigger recapture under 1250, the excess depreciation taken on the property prior to the nontaxable exchange carries over to the property received or purchased. All of the above are false. 41. Which of the following Code provisions or combinations of Code provisions cannot apply to the sale of a single asset? a. b. c. d. Sections 1245 and 1231 Sections 1245 and 1250 Section 1250 only Sections 291, 1250, and 1231 42. X Corporation sold the following depreciable assets during the current year Building used in business, depreciated using straight line, held 15 years, cost $50,000, basis $30,000, gain $40,000 Equipment used in business, depreciated using straight line, held five years, cost $5,000, basis $0, gain $4,000 Land used in business, held 15 years How much is total depreciation recapture for X Corporation for the year? a. b. c. d. $44,000 $4,000 $0 $8,000 17-8 Chapter 17 Property Transactions: Dispositions of Trade or Business Property 43. K sold a building (held seven years and depreciated using an accelerated method) at a gain of $12,000 during the current year. The depreciation allowed was $45,000 and the straight line depreciation would have been $39,500. Which of the following is not true? a. b. c. d. K has 1250 recapture of $5,500. K has unrecaptured 1250 gain of $6,500. K has 1231 gain of $6,500. K's 1231 gain qualifies for the 15 percent capital gain rate. 44. A's gains an losses for the year are summarized as follows: * * * Gain of $4,000 on the sale of corporate stocks held three years. Loss of $400 on the sale of equipment held two years. Gain of $9,000 on the sale of rent house held six years. Straight line depreciation allowed was $6,000. After netting the gains and losses, how are they treated? a. b. c. d. $12,600 N15CG $6,600 N15CG, $6,000 N25CG $7,000 N15CG, $6,000 N25CG, $400 ordinary loss $7,000 N15CG, $5,600 N25CG 17 Property Transactions: Dispositions of Trade or Business Property Solutions to Test Bank True or False 1. True. Section 1231 assets include depreciable property and land used in a trade or business or rental activity. (See p. 17-4.) 2. True. Any increase in the value from the beginning of the year of harvest is ordinary income. (See Example 1, pp. 17-4 and 17-5 and 631.) 3. False. Unharvested crops will be treated as part of the 1231 asset (i.e., the land). [See Example 2 and pp. 17-5 and 17-6 and 1231(b)(4).] 4. False. 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. [See p. 17-6 and 1231(b)(3).] 5. False. 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. (See p. 17-4.) 6. False. This gain or loss would be ordinary in nature. The asset is excluded from the definition of capital assets and is not 1231 property since it was not held more than one year. [See pp. 17-3 and 17-4 and 1221 and 1231(a).] 7. False. 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. The statement is true in the case of a net loss. (See Exhibit 17-1 and pp. 17-7 through 17-13.) 8. False. The look-back is required when the net result is a gain, so the taxpayer must look back to the five prior years to see if any net 1231 losses were reported. (See Exhibit 17.1, Example 6 and p. 17-10.) 9. True. Depreciation recapture on installment sales does not qualify for deferral. [See Example 23 and p. 1735 and 453(i).] 10. True. The basis in the asset is zero and the gain is $3,200. Recapture potential includes not only depreciation but also the amount expensed under 179 or $6,000. Thus, the gain is all ordinary income. (See p. 17-16.) 17-9 17-10 Chapter 17 Property Transactions: Dispositions of Trade or Business Property 11. False. The auto is 1245 property and the recapture potential is all depreciation allowed or allowable (i.e., $6,700). Section 1245 is referred to as the full recapture since all of the depreciation claimed is recaptured. (See p. 17-16.) False. The gain is ordinary income up to the lesser of the gain recognized or the depreciation recapture potential. No more than $50 is recognized. (See Example 8 and p. 17-16.) True. The 1250 recapture potential is the excess of the depreciation allowed over that which would have been allowed using straight line. (See Example 11 and p. 17-17.) True. However, if the accelerated method was used for residential real property purchased during that time period, the property is classified as 1250 property. All depreciable real property acquired before 1982 or after 1987 is also classified as 1250 property. (See p. 17-18.) True. The depreciation recapture provisions reclassify gain as ordinary income, but they do not create gain. They do not apply to losses. (See pp. 17-14 and 17-15.) True. See the definition of 1245 property in 1245(a). (See p. 17-15.) False. Section 1250 property is generally depreciable real estate. (See p. 17-18.) False. The long-term holding period applies for 1231, but not for the recapture provisions. (See p. 17-15.) False. Part or all of the gain can be ordinary. However, the provision is referred to as the full recapture rule because all of the depreciation may be recaptured. (See pp. 17-16 through 17-18.) True. Only the depreciation in excess of straight-line must be recaptured. (See Example 11 and pp. 17-17 through 17-18.) True. Since all depreciation must be recaptured, 1231 only applies to gain in excess of the depreciation allowed. For this to occur, the sales price must exceed the cost of the depreciable asset. (See Example 9 and pp. 17-16 and 17-17.) False. Even though the property is 1250 property, 1250 does not apply to losses. The loss would be a 1231 loss. (See p. 17-20.) False. If the building was sold at a gain, the gain is ordinary income to the extent of any depreciation in excess of straight-line. Since all of the gain is 1231 gain, there was no depreciation recapture (apparently, straight-line depreciation was used or the asset was fully depreciated so that accelerated depreciation and straight-line depreciation were the same). (See Example 11 and pp. 17-17 through 17-21.) True. If the building was sold at a gain, the gain is 25% gain to the extent of the depreciation allowed (or allowable). Since there is 1250 depreciation recapture, an accelerated method of depreciation must have been used. (See Example 12 pp. 17-20 through 17-21.) True. Section 1250 calls only for the recapture of additional depreciation (i.e., depreciation in excess of straight-line). (See Examples 11 through 12, pp. 17-17 through 17-19, and 1250.) False. This may be true in some instances; however, specifically the amount is 20 percent of any 1231 gain that would have been ordinary income if 1245 rather than 1250 had been applied to the transaction. This is normally the straight line depreciation. This may be an amount less than the 1231 gain. (See Examples 21 and 22 and p. 17-27.) 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Multiple Choice 27. c. Cattle and horses are subject to a 24-month holding period to qualify for 1231 treatment. Other livestock must be held more than 12 months. Poultry cannot qualify. [See pp. 17-4 through 17-6 and 1231(b).] Solutions to Test Bank 17-11 28. c. The depreciation recapture is treated as ordinary income, leaving $19,500 of 1231 gain. That gain is treated as ordinary income to the extent of the unrecaptured losses deducted as ordinary deductions in the preceding five years. Because that results in $12,000 being treated as ordinary, only $7,500 is subject to favorable long-term capital gain treatment. (See Examples 6 and 9, pp. 17-10 and 17-16, and 1231.) Since the net result of casualties and thefts of 1231 assets and capital assets is a loss, the loss is deductible as a business casualty. The amount is the adjusted basis. The capital loss is deductible in full since it is within the $3,000 annual limit. (See Exhibit 17.1, Example 5 pp. 17-6 through 17-10.) Since the net result of casualties and thefts of 1231 assets and capital assets is a gain, it is treated as a 1231 gain. This gain of $10,000 is added to the other 1231 gain of $12,000 to arrive at a net 1231 gain of $22,000, which is treated as a long-term capital gain. The $3,000 gain on the sale of the equipment is ordinary income under 1245. (See Exhibit 17.1 pp. 17-7 through 17-10 and 17-15 through 17-17.) Section 1245 converts the character of any gain realized to ordinary income to the extent of the depreciation allowed or allowable. Section 1245 does not affect the amount of gain. (See Example 8, p. 17-16, and 1245.) The recapture potential of 1245 property includes all depreciation or amortization allowed with respect to that property and also includes adjustments to basis related to items that are expensed under the Code. Unlike 1250 that only recaptures the excess depreciation, 1245 recaptures all of the depreciation. Answer a is true since recapture only applies if the gain is recognized. (See p. 17-15.) Answer c is true since 1245 is the full recapture rule and recaptures all depreciation. (See p. 17-16.). Answer d is true since depreciation recapture is not available for deferral. (See Example 23 and p. 17-35.) The statement in choice b. is true, however, of recapture potential with respect to 1250 property. [See 1245(a), (a)(2), (b)(4), and 1250(a).] Had the camera been sold for $550, 1231 would apply to the loss; had it been sold for $1,300, with a $724 gain [$1,300 ($1,200 $624)], 1245 would have applied to $624 for recapture of depreciation and 1231 to the remaining gain of $100. However, had the camera been sold for $1,000, the $424 gain would be less than the camera's recapture potential and 1245 only would apply. [See Examples 7 through 9, pp. 17-15 through 17-17, and 1245(a).] The gain on the sale is calculated as follows: Amount realized on sale Less adjusted basis: Cost Less: Depreciation Gain $1,122 $ 8,000 (7,078) $ 200 29. b. 30. c. 31. a. 32. b. 33. b. 34. a. (922) Gain is all ordinary income to the extent of the depreciation allowed of $7,078. Therefore, the $200 gain is all ordinary. [See Examples 8 through 10, pp. 17-15 through 17-17, and 1245.] 35. c. Statement c may be true, but it is not necessarily true. Gain can and often does result from appreciation of the value of property in addition to recapture of depreciation. (See Example 11 and pp. 17-19 through 17-23.) All of the $1,000 gain [$1,400 ($3,200 $2,800)] on the 1245 property (furniture and appliances) is ordinary income, because it does not exceed the 1245 recapture potential of $2,800. Of the $45,000 gain [$90,000 ($80,000 $35,000)] on the 1250 property (building and improvements), an amount equal to the 1250 recapture potential (i.e., excess depreciation: $35,000 $31,000) is ordinary income and the remaining $41,000 is 1231 gain. (See Examples 8 through 11, pp. 17-15 through 17-19, and 1231 and 1245.) Refer to the solution to Question 36. The 1231 gain includes $41,000 on the 1250 property and $3,000 ($10,000 $7,000) on land. No gain on the 1245 property remains after recapture of depreciation. (See Examples 8 through 11, pp. 17-5 through 17-19, and 1231, 1245, and 1250.) 36. d. 37. a. 17-12 Chapter 17 Property Transactions: Dispositions of Trade or Business Property 38. b. The depreciation recapture is ordinary income and the 1231 loss is an ordinary loss. G's overall capital loss of $4,000 ($1,000 $8,000 $3,000) exceeds the $3,000 deduction limitation. The decrease in A.G.I. is as follows: Depreciation recapture 1231 loss Net capital losses allowed Total decrease to A.G.I. (See Exhibit 17.1, Examples 8 and pp. 17-6 through 17-10 and 17-16.) $ 1,500 (1,000) (3,000) $(2,500) 39. d. Capital gains and recaptured depreciation all increase A.G.I. In H's case, capital gains include $3,000 long-term gains and $1,200 ($3,000 $1,800) net short-term gains on capital assets, as well as a net 1231 gain of $1,600 on the sale of trade and business assets, totaling $5,800. Recaptured depreciation equals $2,000. (See Exhibit 17.1, 17-6 through 17-10 and 17-16, and 1222 and 1231.) a. Depreciation recapture potential that existed prior to a decedent's death is extinguished at death. [See p. 17-24 and 1250(d)(1) through (d)(4) and (d)(7).] b. Sections 1245 and 1250 cannot apply to the same asset. The other combinations are all possible. (See pp. 17-15 through 17-23.) d. Had the building been 1245 property, the depreciation recapture would have been $20,000 (i.e., the depreciation allowed). Therefore the 291 recapture is $4,000 ($20,000 .20). When this is added to the actual 1245 recapture of $4,000, the total recapture is $8,000. (See pp. 17-15 through 17-27.) d. Since the 1231 gain is also unrecaptured 1250 gain, the 25 percent rate applies. (See p. 17-22.) d. There is no 1250 recapture. The unrecaptured 1250 gain (i.e., 25CG) is $6,000 (and part of the 1231 gain). The remaining gain on the rent house is 1231 gain qualifying for the 15 percent rate. So the total qualifying for the 15 percent rate is $7,000 ($4,000 $3,000); 25 percent, $5,600 ($6,000 $400). Note that the $400 loss is a 1231 loss and offsets the higher rate 25 percent gain. (See Example 15 and p. 17-22.) 40. 41. 42. 43. 44. 17 Property Transactions: Dispositions of Trade or Business Property Comprehensive Problems 1. Alice sold several properties during the current year. The relevant information is as follows: Holding Period Original Cost Depreciation Allowed Sales Price Asset Description Business building Business land Business equipment Personal residence Personal auto XYX Corp. common stock Stamp collection Long-term Long-term Long-term Long-term Long-term Short-term Long-term $60,000 30,000 20,000 70,000 5,000 4,000 200 $20,000 n/a $15,000 n/a n/a n/a n/a $55,000 45,000 7,000 90,000 2,200 3,000 3,500 11- he only other relevant information is that within the year Alice reinvested $105,000 in a new residence and T that she used the straight-line method to depreciate the business building. She sold no other assets during the year and has no 1231 transactions in any of the prior five years. Determine the amount and character of the gain and loss from each sale and the aggregate impact on her adjusted gross income. 2. Eleanor sold her small retail business during her current calendar year, receiving the following: Asset Description Holding Period Sales Price Adjusted Basis Inventory Equipment Goodwill Total n/a three years 15 years $ 3,500 5,000 20,000 $28,500 $4,600 1,000 0 $5,600 The equipment was originally purchased for $4,000 and he goodwill was generated over the 15 years that Eleanor was in business. In addition, Eleanor sold her personal residence at a short-gain of $11,000. The gain did not qualify for exclusion under 121. Summarize the tax effect of these sales: Ordinary income Net 1231 gain or loss Long-term capital gain or loss Short-term capital gain or loss Provide detailed calculations. 17-13 17-14 Chapter 17 Property Transactions: Dispositions of Trade or Business Property Solutions to Comprehensive Problems 1. Alice's gains and losses are: Business building Business land Business equipment Personal residence Personal auto XYX Corp. common stock Stamp collection 1231 gain of $15,000 1231 gain of $15,000 1245 recapture of $2,000 Deferred gain under 1034 Nondeductible loss of $2,800 Short-term capital loss of $1,000 Long-term capital gain of $3,300 When combined, these sales result in ordinary income of $2,000 and a net capital gain of $32,300 [($15,000 $15,000 $3,300) long-term gain $1,000 short-term loss]. Both are fully included in A.G.I. and taxable income, and the net capital gain may be subject to the favorable 15 percent or 25 percent capital gains rate. 2. Eleanor has the following gains and losses from the sale of her small retail business: Inventory: $1,100 ordinary loss Equipment: $3,000 ordinary gain $1,000 1231 gain Goodwill: $20,000 long-term capital gain Residence: $125,000 excluded, $11,000 long-term capital gain The tax effect of these sales is: Ordinary income $1,100 on inventory $3,000 depreciation recapture Net 1231 gain or loss $4,000 gain on equipment $3,000 depreciation recapture Long-term capital gain or loss* $1,000 1231 gain $20,000 on goodwill None Short-term capital gain or loss *$1,000[ 1231] $20,000 $11,000. All qualify for the 15 percent (or 5 percent) capital gains rate. $ 1,900 $ 1,000 $ 21,000 $ 11,000 ...
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