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

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Question 41

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Which of the following is correct?

A) Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross income.
B) Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross income.
C) Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross income.
D) Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross income.
E) All of the above.

F) None of the above
G) All of the above

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Question 42

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

A) True
B) False

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Question 43

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On January 10, 2016, Wally sold an option for $2,000 on vacant land he held as an investment. He had purchased the land in 2012 for $76,000. The option allowed the option holder to purchase the property for $122,000 plus the cost of the option. On March 1, 2016, the option holder exercised the option. What is the amount and nature of Wally's gain or loss from disposition of the land?

Section 1231 applies to the sale or exchange of business properties, but not to personal use activity casualties.

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:

Martha has both long-term and short-term 2015 capital gains and losses. The result of netting these gains and losses is a net long-term capital loss. Martha has no qualified dividend income. Also, Martha's 2015 taxable income puts her in the 28% tax bracket. Which of the following is correct?

On January 18, 2015, Martha purchased 200 shares of Blue Corporation stock for $2,000. On November 11, 2016, she sold short 200 shares of Blue Corporation stock which she borrowed from her broker for $2,300. On February 10, 2017, Martha closed the short sale by delivering the 200 shares of Blue Corporation stock which she had acquired in 2015. On that date, Blue Corporation stock had a market price of $4 per share. What is Martha's recognized gain or loss and its character in 2016? In 2017?

Ryan has the following capital gains and losses for 2016: $6,000 STCL, $5,000 28% gain, $2,000 25% gain, and $6,000 0%/15%/20% gain. Which of the following is correct:

Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.

The chart below describes the § 1231 assets sold by the Tan Company (a sole proprietorship) this year. Compute the gain or loss from each asset disposition and determine the net § 1231 gain treated as long-term capital gain for the year. Assume there is a § 1231 lookback loss of $14,000.

Judith (now 37 years old) owns a collection of porcelain dolls that she acquired when she was a grade schooler. She had forgotten about them until her mother sent them to her. Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it. Judith had originally acquired all the dolls as gifts from her parents, so she has no way to establish a basis for the dolls. Using information from the Internet, she prepares a careful inventory of the dolls that includes their name, when they were first available for sale, their current value, and other pertinent information. She then lists them for sale on the Internet. To her surprise, she quickly gets an offer of $5,000 for all of them and sells them. Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket. What issues do these facts create?

In early 2015, Wanda paid $33,000 for an option on a parcel of land she intended to hold as an investment. After a survey of the land (paid for by the grantor) determined that the parcel was much smaller than the grantor said it was, she let the option lapse when it expired in 2016 after 14 months. How should Wanda treat these events in 2015? 2016?

Which of the following assets held by a cash basis accounting firm is a § 1231 asset?

For tax purposes, there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating. The taxpayer immediately sells the note to a bank for less than the note's stated value. The taxpayer has an ordinary loss.

Section 1245 depreciation recapture potential does not carryover from the deceased taxpayer to the beneficiary taxpayer.

If a capital asset is sold at a gain, the holding period is important.

Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.

Phil's father died on January 10, 2016. The father had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10, 2015, when the stock was worth $430,000. His father paid gift tax of $31,000. This stock was worth $566,000 at the date of the father's death. Phil sold the stock for $545,000 net of commissions on February 23, 2016. What is the amount and nature of Phil's gain or loss from disposition of this property?

Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold Company (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold Company also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?