Fundamentals of Taxation 2018 Edition, 11e (Cruz)

Chapter 7 Capital Gains and Other Sales of Property (Schedule D and Form 4797)

1) When the buyer assumes the seller's liability, the seller includes this amount in computing the amount realized from the sale.

2) The forms used to report a gain or loss on the sale of an asset depend on the classification of the asset being sold rather than on how the asset was used prior to sale.

3) Property owned by a taxpayer and used either for personal purposes, investment, or in a trade or business is a capital asset.

4) A computer used exclusively in a sole proprietor's business is a capital asset.

5) Real property held for investment is a capital asset.

6) Inventory on hand at the end of the year is Section 1231 property.

7) Section 1202 allows for an exclusion of up to 50% of the eligible gain on the sale or exchange of qualified small business stock if held for more than one year.

8) The donee's basis in depreciated property (when the FMV at the time of the gift is less than the donor's basis) is FMV at the time of the gift.

9) The holding period for property acquired by inheritance begins on the date of the decedent's death.

10) The holding period of an asset starts on the date acquired and ends on the day the asset is sold.

11) Short-term capital losses first reduce 28% gains, then 25% gains, and if any loss remains, the 20%, 15% or 0% group.

12) Currently, the maximum long term capital gain rate applied to a taxpayer in the 15% regular tax bracket is 0%.

13) Unused capital losses in any one year carry forward indefinitely to offset any future short-term or long-term gains.

14) To qualify as Section 1231 property, the property must be used in a taxpayer's trade or business and must be held for less than one year.

15) If Section 1231 losses exceed Section 1231 gains, the excess is treated as an ordinary loss.

16) The purpose of Code Sections 1245 and 1250 recapture provisions is to restrict the possibility of converting ordinary income into capital gains through use of depreciation deductions.

17) If the taxpayer's aggregate Section 1231 gains for the year exceed aggregate Section 1231 losses for the year, all such gains and losses are considered to be ordinary.

18) If a taxpayer has a net Section 1231 loss for the year, all Section 1231 gains and losses are treated as being capital gains and losses.

19) If the property's fair market value at the date of the gift is lower than the adjusted basis, then the property's basis for determining loss is its fair market value on that date.

20) The basis of inherited property to the beneficiary is the FMV at the date of death or alternate valuation date.

21) If a taxpayer cannot specifically identify which shares of stock were sold, the average cost of all shares held is used as the adjusted basis of the shares that were sold.

22) The taxpayer always reports a worthless security as a long-term capital loss in the year the security becomes worthless.

23) If the taxpayer has capital gain distributions from a mutual fund and no other capital gain transactions for the year, a Schedule D is not required to be prepared.

24) A taxpayer who receives only one form 1099-B from the sales of stock can enter the transaction directly to Schedule D.

25) To figure the gain or loss from the sale of property received as a gift, the donor's adjusted basis at the time of the gift is the basis to the donee.

26) The amount realized from a sale or trade of property is the amount received for the asset minus the basis that will be recognized for tax purposes.

27) In general, the basis of property purchased is the cost of the asset including cash, debt obligations, and other property or services included in acquiring the asset.

28) The basis of property transferred to a taxpayer from a spouse or former spouse incident to a divorce is the FMV of the property at the date the divorce was final.

29) If land were an investment held in a trade or business, the gain or loss would be reported on Schedule D.

30) Section 1221 assets are any asset used in a trade or business.

31) Capital assets are usually defined by the IRC as any asset used for personal or investment purposes and sometimes are defined by the IRC as what they are not.

32) When a Section 1231 asset is sold, the gain can be only classified as an ordinary gain.

33) Ordinary gains or losses produced outside the normal course of business relate to the sale of business property held less than one year and do not include the sale of accounts receivable.

34) The 25% bracket is a special rate that relates to capital gains from Section 1250 property used in a trade or business.

35) A taxpayer can deduct a loss on a security when the market price of the stock is less than the basis at the end of the year.

36) All gains and losses on the sale of property that was held for more than one year is subject to preferential tax rates.

37) All net losses exceeding the $3,000 per year are carried over as long-term losses because they will have occurred more than one year ago.

38) For sales of Section 1231 business property, long-term gains are taxed at preferential rates while long-term losses are considered ordinary losses and have unlimited loss deductibility in the year they are incurred.

39) Any Section 1245 gain is recognized as "ordinary" to the extent of the depreciation taken.

40) To figure the gain or loss from the sale of property received as a gift, the donee must know the donor's adjusted basis as well as the FMV at the date of the gift.

41) Before the tax implications of asset sales can be determined, which of the following must be determined?

A) assets must be classified as either personal, trade or business, or investment assets.

B) the length of time the taxpayer owned the property.

C) whether the assets are subject to depreciation.

D) all of these.

42) Patrice sells a parcel of land for $50,000 cash and the buyer assumes Patrice's liability of $7,000 on the land. Patrice's basis in the land is $40,000. What is the gain or loss she will recognize on the sale?

A) $3,000 gain.

B) $10,000 gain.

C) $17,000 loss.

D) $17,000 gain.

43) A taxpayer purchased land in 2008 for $85,000 and sold it in 2017 for $75,000 cash. The buyer also assumed the mortgage of $5,000. What is the amount of gain/loss on the sale of the land?

A) $5,000 loss.

B) $5,000 gain.

C) $15,000 gain.

D) $20,000 loss.

44) The gain or loss on land sold within one year of purchase is recorded on which one of the following forms or schedules?

A) Form 4797 if the sale was an asset held for investment purposes by a taxpayer who is a sole proprietor.

B) Form 4797 if the sale was an asset used in a trade or business by a sole proprietor.

C) Schedule D if the sale was an asset used in a trade or business by a sole proprietor who also files a Schedule C.

D) Schedule C if the sale was an asset used in a trade or business of a sole proprietorship.

45) Which one of the following is Section 1231 property?

A) Accounts receivable.

B) Copyright owned by an author.

C) Inventory.

D) A building used in a trade or business.

46) Which one of the following is a capital asset?

A) Household furnishings.

B) Business inventory.

C) A non-musical copyright created by the taxpayer.

D) Rental property.

47) What is the basis of artistic works that have been gifted to another by the creator?

A) Artistic works are not capital assets for the creator or the recipient of the artistic works if given as a gift.

B) Artistic works are not capital assets for the creator but are capital assets in the hands of the recipient if the creator gave the artistic works as a gift.

C) Artistic works are capital assets to the creator if they are sold to an unrelated person.

D) Artistic works are capital assets if they were available for sale in an art gallery.

48) Section 1231 property is:

A) Property used in a trade or business that is subject to depreciation and is held for more than one year.

B) Property used in a trade or business that may or may not be subject to depreciation and held for less than one year.

C) All property used in a trade or business regardless of how long the asset is held.

D) Property used in a trade or business that may or may not be subject to depreciation and is held for more than one year.

49) Juanita is a sole proprietor who has some outstanding receivables she wishes to sell. The receivables have a $16,000 FMV and a basis of $10,000. Juanita sells the receivables for $12,500. What gain or loss does Juanita recognize on the sale?

A) $3,500 capital loss.

B) $3,500 ordinary loss.

C) $2,500 capital gain.

D) $2,500 ordinary gain.

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50) Marquez purchased some equipment for $58,750 on August 15, 2016. He decided he did not need the equipment so he sold it on June 13, 2017 for $56,500. The equipment was subject to depreciation of $6,964 for 2016 and 2017. What gain or loss will Marquez recognize on the sale of the equipment?

A) $2,250 ordinary loss.

B) $2,250 capital loss.

C) $4,714 ordinary gain.

D) $4,714 capital gain.

51) Lourdes, a sole proprietor, collected $8,650 on November 21, 2017 on some of her outstanding receivables. Her basis in these receivables was $0. What is the gain or loss Lourdes recognizes for 2017?

A) no gain or loss as the payments are within the normal course of business.

B) a short-term gain as the payments are from receivables that are always considered short-term.

C) a short-term loss as the FMV is greater than the payments received on the receivables.

D) an ordinary gain because the receivables had a FMV greater than the basis of the receivables.

52) Which of the following statements is correct regarding the sale of ordinary assets, as discussed in this chapter?

A) the sale of inventory for a profit is considered to be a sale of an ordinary asset.

B) the sale of an asset outside the normal course of a trade or business is a sale of an ordinary asset.

C) the sale of business property held for more than a year is a sale of an ordinary asset.

D) the sale of any business property regardless of holding period is a sale of an ordinary asset.

53) On which form or schedule is the selling of inventory related to the course of business recorded for a sole proprietor?

A) Form 4797.

B) Schedule C.

C) Schedule SE.

D) Schedule D.

54) Hiroko, a single taxpayer, has wage income of $80,000. In addition, she has $5,000 in long-term capital losses, $4,000 in long-term capital gains, and $4,000 in short-term capital gains. What is Hiroko's AGI for 2017?

A) $72,000.

B) $73,000.

C) $83,000.

D) $88,000.

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55) A taxpayer has 6 separate capital gain transactions. Four of them are long-term and two are short-term transactions. Two of the long-term transactions have box 3 from Form 1099-B checked, one does not have box 3 from Form 1099-B checked, and there was no 1099-B received for one of the long-term transactions. One short-term transaction has box 3 from a 1099-B checked and the other transaction does not have box 3 from a 1099-B checked. How many Form 8949 must the taxpayer complete?

A) 1.

B) 2.

C) 3.

D) 4.

56) Caesar, a single taxpayer, has wage income of $75,000. He also has a short-term capital loss of $5,000, a short-term capital gain of $2,000, and a long-term capital gain of $3,000. What is Caesar's AGI for 2017?

A) $72,000.

B) $75,000.

C) $77,000.

D) $78,000.