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Exam 17: Property Transactions: Section 1231 and Recapture Provisions

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Question 21

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Orange Company had machinery completely destroyed by a fire on December 23, 2019.The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200.Orange received $30,000 of insurance proceeds for the machinery and did not replace it.This was Orange's only casualty or theft event for the year.As a result of this event, Orange has:

A) $4,200 ordinary loss.
B) $15,800 § 1245 recapture gain.
C) $14,200 § 1245 recapture gain.
D) $30,000 § 1231 gain.
E) None of these.

F) A) and B)
G) All of the above

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Question 22

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Which of the following events could result in § 1250 depreciation recapture?

A) Sale at a loss of a depreciable business building held more than one year.
B) Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C) Sale at a loss of a depreciable business building held for nine months.
D) Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E) None of these.

F) D) and E)
G) B) and E)

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Question 23

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

Section 1231 property includes nonpersonal use property whose casualty gains exceed casualty losses for the taxable year.

Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.

A personal use property casualty loss that occurs in a nonfederally declared disaster area is deductible only to the extent it exceeds 10% of AGI.

Vertical, Inc., has a 2019 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2018.For 2019, Vertical's net § 1231 gain is treated as:

A business machine purchased April 10, 2018, for $62,000 was fully depreciated in 2018 using § 179 immediate expensing.On August 15, 2019, the sole proprietor who owned the machine gave it to his son.On that date, the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and sold it on November 22, 2019, for $53,000.What are the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?

Which of the following is correct?

Copper Corporation sold machinery for $47,000 on December 31, 2019.The machinery had been purchased on January 2, 2016, for $60,000 and had an adjusted basis of $41,000 at the date of the sale.For 2019, what should Copper report?

Nonrecaptured § 1231 losses from the six prior tax years may cause current-year net § 1231 gain to be treated as ordinary income.

An individual has the following recognized gains and losses from disposition of § 1231 assets (all were vacant land) : $15,000 gain, $10,000 loss, $25,000 gain, and $2,000 loss.The individual has a $5,500 § 1231 lookback loss.The individual also has a $16,000 net short-term capital loss from the disposition of stock.Which of the following statements is correct?

Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.

A sheep must be held more than 18 months to qualify as a § 1231 asset.

Business equipment is purchased on March 10, 2018, used in the business until September 29, 2018, and sold at a $23,000 loss on October 10, 2018.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2018 Form 4797, Part:

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:

Verway, Inc., has a 2019 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2017.For 2019, Verway's net § 1231 gain is treated as:

Lynne owns depreciable residential rental real estate that has accumulated depreciation of $65,000 (all from straight- line) .If Lynne sold the property, she would have a $53,000 gain.The initial characterization of the gain would be:

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?

The Code contains two major depreciation recapture provisions: § 1245 and § 1250.