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Exam 8: Capital Gains and Losses

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Question 71

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Mike is a self-employed TV technician.He is usually paid as soon as he completes repairs, but occasionally bills a customer with payment expected within 30 days.At the end of the year he has $2,500 of receivables outstanding.He expects to collect $1,200 of this and write off the remainder.Mike is a cash basis taxpayer and had net earnings from his business (not including the effect of the items above) of $55,000.He also had $3,500 interest income, $200 gambling winnings, and sold corporate stock for $7,000.The stock had been purchased in 2013 for $8,200.Mike is single, has no dependents, and claims the standard deduction.What is his 2017 taxable income? (Ignore the self-employment tax deduction.)

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Since Mike is a cash basis taxpayer, he ...

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Question 72

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An individual taxpayer received a valuable painting from his uncle, a famous painter.The painter created the painting.After the taxpayer held the painting for two years, he sold it for a $400,000 gain.The gain is a long-term capital gain.

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B) False

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Question 73

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Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:

Assume a building is subject to § 1250 depreciation recapture because bonus depreciation [§ 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?

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

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?

The possible holding periods for capital assets include:

Charmine, a single taxpayer with no dependents, has already incurred a $10,000 § 1231 gain in 2017 and has no § 1231 lookback losses.The taxpayer purchased a business machine for $100,000 five years ago, $70,000 of depreciation has been taken on it, and the machine is now worth $90,000.How will the net § 1231 gain or loss be affected if the taxpayer trades in the business machine for a like-kind business machine and pays an additional $12,000 in cash to obtain the replacement machine? If Charmine already has $352,000 of taxable income which does not include a $10,000 § 1231 gain or any capital gains or losses, what is her taxable income?

An individual has a $40,000 § 1245 gain, a $35,000 § 1231 gain, a $33,000 § 1231 loss, a $3,000 § 1231 lookback loss, and a $15,000 long-term capital gain.The net long-term capital gain is:

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

In 2013, Aaron purchased a classic car that he planned to restore for $12,000.However, Aaron is too busy to work on the car and he gives it to his daughter Ellie in 2017.At this time, the fair market value of the car has declined to $10,000.Aaron paid no gift tax on the transaction.Ellie completes some of the restoration herself with out-of-pocket costs of $5,000.She later sells the car for $30,000.What is Ellie's recognized gain or loss on the sale of the car?

A franchisor licenses its mode of business operation to a franchisee.

White Company acquires a new machine for $75,000 and uses it in White's manufacturing operations.A few months after White places the machine in service, it discovers that the machine is not suitable for White's business.White had fully expensed the machine in the year of acquisition using § 179.White sells the machine for $60,000 in the tax year after it was acquired, but held the machine only for a total of 10 months.What was the tax status of the machine when it was disposed of and the amount of the gain or loss?

Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.

Virgil was leasing an apartment from Marple, Inc.Marple paid Virgil $1,000 to cancel his lease and move out so that Marple could demolish the building.As a result:

Which of the following is correct?

Which of the following is correct concerning short sales of stock?

To compute the holding period, start counting on the day after the property was acquired and include the day of disposition.

Williams owned an office building (but not the land) that was destroyed by a fire.The building was insured and Williams has a $156,000 gain because his insurance recovery exceeded his adjusted basis for the building.Williams may replace the building.Williams had taken $145,000 of depreciation on the building, has no § 1231 lookback loss, has no other § 1231 transactions for the year, and has no Schedule D transactions for the year.What is the final nature of Jamison's gain for the year and what tax rate(s) apply to the gain if: (a) He does reinvest the insurance proceeds? (b) If he doesn't reinvest the insurance proceeds?