property taxation mc - weebly · d. mid-quarter convention: must be used if more than 40% of group...
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Property Taxation
MC/PK
Property Taxation
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ADJUSTED BASIS
Cost of acquisition
Costs to prepare for use
Improvements
(Depreciation*)
Adjusted basis
*If used in a trade or business
Notes:
Property Taxation
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PERSONAL PROPERTY DEPRECIATION
A. Personal Property Categories
1. 5-Year Property: Computers, autos, trucks, machinery, and equipment 2. 7-Year Property: Furniture and fixtures
3. Other Personal Property Categories: Rarely tested
B. Modified Accelerated Cost Recovery System (MACRS)
1. Double-declining balance
2. Optional straight-line
3. Salvage Value: Not considered
C. Half-Year Convention: One-half year’s depreciation in year of acquisition and one-half year’s depreciation in year of disposal
D. Mid-Quarter Convention: Must be used if more than 40% of group of assets is acquired in the last quarter of the year (Mid quarters are February 15th, May 15th, August 15th, and November 15th)
Example 1: Mid-Quarter Convention
Treat 1st asset as if bought February 15 (10 ½ months of depreciation)
Treat 2nd asset as if bought November 15 (1 ½ months of depreciation)
Notes:
5-Year Property 7-Year Property
DDB 1/5 2/5 2/5 2/5 2/5 1/5 1/7 2/7 2/7 2/7 2/7 2/7 2/7 1/7
February 1st Computer $10,000 25%
December 1st Computer 30,000 75%
$40,000 100%
Property Taxation
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E. Bonus Depreciation: Calculated after Section 179 deduction and before MACRS deduction
1. Placed in Service
a. In 201 50%
b. In 2018: 40%
2. Eligible Property: Must be new (not used property)
a. Property eligible for MACRS with a recovery period of 20 years or less
b. Water utility property
c. Off-the-shelf computer software
d. Qualified leasehold property
e. Qualified real property
3. May elect out of bonus depreciation on a class-by-class basis
4. May accelerate research and AMT credits instead of taking bonus depreciation
Notes:
Property Taxation
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SECTION 179
A. Limit: May elect to expense up to the limit for business-use new or used personal (not real) property per return (particularly subject to tinkering by Congress)
B. Restriction: Cannot result in net operating loss (NOL)
C. Election: Made in the first year property is placed into service
Example 2: Section 179
Taxpayer placed in service $550,000 of trucks (100% business use) in Year 1, when the Section 179 maximum is $500,000 and elected to take 50% bonus depreciation.
Notes:
Year Maximum Phase-out Threshold
2017 $500,000 $2,000,000
Year 1 Deduction Basis Depreciation
Truck cost $ 550,000
Section 179 expense (500,000) $500,000
Basis for bonus deduction $ 50,000
50% bonus depreciation (25,000) $ 25,000
Basis for MACRS deduction $ 25,000
Depreciation (25,000 x 1/5) (5,000) 5,000
Adjusted basis after Year 1 $ 20,000
Year 1 deduction $530,000
Year 2 Deduction
Depreciation (20,000 x 2/5) (8,000) $ 8,000
Adjusted basis after Year 2 $ 12,000
Property Taxation
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D. Phase-out: Dollar for dollar when purchases are greater than the phase-out threshold for
investment
Example 3: Section 179 Phase-out
Notes:
2017
Truck cost $2,100,000
Phase-out threshold 2,000,000
Phase-out (not greater than maximum) $ 100,000
Maximum Section 179 deduction $ 500,000
Phase-out (not greater than maximum) 100,000
Allowable Section 179 deduction $ 400,000
Property Taxation
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REAL PROPERTY DEPRECIATION
A. Real Property Categories
1. Residential Rental: Straight-line over 27½ years
2. Non-residential: Straight-line over 39 years
B. Never depreciate land
C. Mid-Month Convention: One-half month’s depreciation in month of acquisition and
one-half month’s depreciation in month of disposal
Notes:
Property Taxation
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SECTION 1231
A. Capital Assets
NOT Capital Assets (MR CIA)
M Machinery and equipment used in business
R Real estate used in business
C Copyrights – in hands of original artist
I Inventory
A Accounts/notes receivable
B. Section 1231 Assets: Depreciable property and real estate used in business that were held more than one year before being sold
1. Total Gains > Total Losses: Result in treatment as long-term capital gains
a. Section 1245: Recapture all depreciation on personal property up to
amount of gain as ordinary income
Any further gain is treated as capital gain (Section 1231)
b. Section 1250: Non-corporate taxpayers recapture all depreciation on real property in excess of straight-line as ordinary income
(1) Gain up to straight-line depreciation taxed at 25%
(2) Any further gain is treated as capital gain (Section 1231)
2. Total Losses > Total Gains: Result in ordinary losses
Notes:
Property Taxation
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AMORTIZATION & DEPLETION
A. Amortization (Section 197): Intangible assets that were purchased or acquired (not
created assets) are eligible to be amortized straight-line over 180 months, beginning with the month of acquisition
1. Eligible Assets
a. Goodwill
b. Copyrights
c. Patents
d. Trademarks / trade names
e. Customer lists
f. Convents not to compete
g. Franchises
h. Licenses
2. Ineligible Assets: Professional sports franchises
B. Depletion: Natural resources (oil, coal, etc.)
1. Cost Method: Optional
2. Percentage Method: Statutory percentage of income Independently answer multiple-choice questions (MCQ)
Notes:
Property Taxation
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CAPITAL GAINS & LOSSES A. Capital Gains (Losses): Result from the sale or exchange of capital assets
NOT Capital Assets (MR CIA)
M Machinery and equipment used in business
R Real estate used in business
C Copyrights
I Inventory
A Accounts/notes receivable
B. Holding Period
1. Long-term: More than 12 months
2. Short-term: Less than or equal to 12 months
C. Netting Capital Gains & Losses Example 4: Capital Gains & Losses, Individual
D. Loss Treatment
1. Individuals
a. Deduct up to $3,000 loss on business-use or investment property in the current year and carry forward the remaining indefinitely
b. No losses allowed on personal-use property
2. Corporations: No deduction (capital losses only offset capital gains)
a. Carry back 3 years and forward 5 years
b. Losses carried as short-term Independently answer MCQs 9-14.
Short-term capital gain (STCG) $10,000
Short-term capital loss (STCL) (9,000)
Long-term capital gain (LTCG) 6,000
Long-term capital loss (LTCL) (16,000)
Short-term net gain $ 1,000
Long-term net loss (10,000)
Net capital loss $ (9,000)
Property Taxation
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GIFTS
A. Donee Income: No gross income for donee upon receipt of gift
B. Donee Holding Period: Donor’s holding period
C. Donee Basis: Basis of gifted property from living donor depends upon FMV and donor's basis at the time of gift
1. Gift of Appreciated Property (in other words, on day of gift, FMV > basis)
Example 5: Donee Gain
The donor had a basis of $10,000 and FMV of $50,000 at time of gift. Later, the donee sells the gift for $100,000.
Sale $100,000
Basis (same as donor’s basis) (10,000)
Donee Gain $ 90,000
Example 6: Donee Gain With Paid Gift Tax by Donor
The donor had a basis of $10,000 and FMV of $50,000 at time of gift. The donor paid gift tax of $5,000. Later, the donee sells the gift for $100,000. Appreciation of $40,000 / Basis of $50,000 = 80% 80% × $5,000 tax = $4,000 adjustment
Sale $100,000 Adjusted Basis ($10,000 + $4,000) (14,000)
Donee Gain $ 86,000
Donee basis is donor’s basis
Notes:
Property Taxation
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2. Gift of Devalued Property (in other words, on day of gift, FMV < basis)
Example 7: Donee Sells Gift
Donor basis of $100,000 in an asset with FMV of $75,000 at time of gift
Sell Basis Gain (Loss)
$107,000 $100,000 $ 7,000 gain
60,000 75,000 15,000 loss
85,000 85,000 No gain (loss)
a. Gain: Use donor’s basis to measure gain
b. Loss: Use FMV to measure loss
c. Sold Between FMV and Donor’s Basis: No gain or loss results from disposition
Notes:
Property Taxation
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INHERITANCES
A. Description: Gift from a decedent donor
B. Donee Income: No gross income for donee upon receipt of inheritance
C. Donee Basis: Fair market value (FMV) on one of three dates
Example 8: Inheritance
Decedent dies April 1, when the basis is $100,000 and the FMV is $600,000. Six months later, the FMV is $700,000. On August 1, the FMV is $680,000. AVD not chosen: Basis $600,000 AVD chosen: Basis $700,000 AVD chosen and property is distributed August 1: Basis $680,000
1. FMV on date of death 2. If alternate valuation date (AVD) is chosen, then use FMV 6 months after date of
death
May be selected only if it reduces the value of estate and inheritance taxes
3. If AVD is chosen and property is distributed within 6 months, then use FMV on date of distribution
D. Donee Holding Period: Automatically long-term
Independently answer MCQs 15-20. Notes:
Property Taxation
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LIKE-KIND EXCHANGES
A. Eligible Exchanges
1. Personal property used in business for personal property used in business
2. Real estate used in business for real estate used in business B. Boot Received Triggers Gain
1. Cash
2. Unlike property
3. Debt relief
C. Basis of New Property
Basis of Old Asset
Boot Paid
(Boot Received)
Taxable Gain Recognized
Basis of New Asset
Notes:
Property Taxation
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Example 9: Like-Kind Exchange
A B
Building FMV 500,000 Building FMV 400,000
Mortgage 100,000
Basis 300,000 Basis 250,000
FMV of building received by A $400,000
Debt relief (mortgage relief) 100,000
Total consideration $500,000
Basis of the old asset (300,000)
A's gain indicated $200,000
Gain recognized is the lower of indicated gain ($200,000) or boot received ($100,000). Thus, the recognized (taxable) gain is $100,000.
Basis of old asset $300,000
Boot paid 0
Boot received (debt relief) (100,000)
Gain taxed 100,000
A's basis in new asset $300,000
D. Ineligible Exchanges: Stocks, bonds, inventory, notes, and partnership interests
Independently answer MCQs 21-22.
Notes:
Property Taxation
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RELATED PARTY TRANSACTIONS
A. Losses: Disallowed
Disallowed loss may offset subsequent gain, if any.
Example 10: Related Party Transaction Father had stock with a basis of $20,000. He sold it to his son for $15,000. The $5,000 loss is disallowed to the father. Example 10A: Sale at Gain - the son sells the stock for $24,000.
Son’s sale price $24,000
Son’s basis (15,000)
Son’s realized gain $ 9,000
Father’s disallowed loss (5,000)
Son’s taxable gain $ 4,000
Example 10B: Sale at Loss - The son sells the stock for $8,000.
Son’s sale price $ 8,000
Son’s basis (15,000)
Son’s loss $(7,000)
Note: Father’s disallowed loss from the earlier transaction is gone.
B. Related Parties
1. Family Members: Grandparents, parents, children, grandchildren, brothers, sisters, aunts, uncles, nieces, and nephews
2. More than 50% shareholder and corporation
3. More than 50% partner and partnership
C. Holding Period: Start new holding period Independently answer MCQs 23-24. Notes:
Property Taxation
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INVOLUNTARY CONVERSIONS
A. Definition: Reimbursement for
1. Condemned property
2. Destroyed, damaged, or stolen property
B. Gain Recognition: Defer gain recognition if property is replaced within statutory period
1. Condemned: Gain deferred, if replacement property is purchased by last day of third year that the gain is realized
2. Destroyed, Damaged, or Stolen: Gain deferred, if replacement property is
purchased by last day of second year that the gain is realized
Example 11: Involuntary Conversion
Conversion August 1, Year 1
Land cost $200,000
County paid 210,000
Gain 10,000
Condemned: Gain deferred if replacement property is purchased by December 31, Year 4.
Other: Gain deferred if replacement property is purchased by December 31, Year 3.
Independently answer MCQ 25. Notes:
Property Taxation
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STOCK ISSUES
A. Stock Dividends: Generally not taxable, unless cash option
B. Wash Sale 1. A loss on a stock sale is disallowed if the same stock is purchased either 30 days
prior to or 30 days after the sale.
2. The disallowed loss is added to new stock basis.
C. Worthless Stock
1. Treat as a sale or exchange as of the last day of the year.
2. Capital Loss: Individuals deduct up to $3,000 in the current year and carry forward the remaining loss indefinitely.
3. Exception: If Section 1244 business stock is deemed worthless, the owner may
deduct up to $50,000 (joint filers deduct up to $100,000) as an ordinary loss.
(a) Original owners only
(b) Limited to amount paid for stock Independently answer MCQ 26-27.
Notes:
Property Taxation
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SALE OF HOME
A. May exclude gain up to $500,000 on a joint return or $250,000 on a single return
1. Exclusion available once every 2 years
2. Occupy home as principal residence for at least 2 of previous 5 years
3. Need not replace with a new home
4. Widow or widower may exclude gain up to $500,000 up to 2 years from death of spouse
B. Losses not deductible Independently answer MCQ 28. Notes:
Property Taxation
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ESTATE TRANSFER TAX
A. Estate Taxes
1. Transfer tax (once)
a. Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return
b. Tax based on fair market value of estate
c. Due 9 months after death, 9-month extension available
2. Income tax (annually) a. Form 1041, U.S. Income Tax Return for Estates and Trusts
b. Tax based on income earned while a going concern
B. Gross Estate: Fair market value of all world-wide property to the extent of decedent’s beneficial interest 1. Life insurance proceeds
2. Income in respect of decedent (IRD): Anything payable to estate
a. Salaries
b. Rents
c. Royalties
d. Dividends
3. Incomplete gifts
4. Revocable transfers
5. Property jointly held with a. Spouse: 50% included in gross estate
b. Other Party: 100% included in gross estate, less the other party’s investment
Property Taxation
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C. Nondiscretionary Deductions 1. Funeral expense
2. Administrative expense
3. Indebtedness of estate property
4. Claims against the estate
D. Discretionary Deductions 1. Material deduction (unlimited)
2. Charitable bequests (unlimited)
E. Estate Tax Due
Exhibit 4: Form 706 Basic Format
Gross estate
(Nondiscretionary deductions)
Adjusted gross estate
(Discretionary deductions)
Taxable estate
Taxable gifts made after 1976
Tentative tax base
x Uniform tax rates
Tentative estate tax
(Gift taxes paid)
Gross estate tax
(Unified credit)*
Estate tax due
*The unified credit (also known as the applicable credit) effectively exempts $ from estate tax for 201
Property Taxation
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GIFT TRANSFER TAX
A. Gift tax Filing
1. Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return
2. Due April 15th, but only if gift tax is due
B. Gift: Transfer of property for less than adequate consideration 1. Tax imposed on donors of inter vivos gifts (gift made during lifetime)
2. Nontaxable to beneficiaries
C. Annual Per-Donee Exclusion: Donors may exclude from tax for each donee annually ($1 ,000 in 201 ) 1. Husbands and wives may split gifts and double the exclusion (gift by either spouse
treated as one-half from each)
2. Gifts must be present interest (right to possess, enjoy, and use property immediately) to qualify for exclusion
3. Incomplete gifts or gifts of future interest do not qualify for exclusion a. Remainders: Distribution at future date
b. Trust Income Interests: Distributed in future at trustee’s discretion
c. Reversions
D. Unlimited Exclusion
1. Spouse
2. Charities
3. Paid directly to
a. Educational institutions for tuition (not books or room and board)
b. Health care provider for medical care
4. Political contributions
Independently answer MCQ 29-33.
Property Taxation
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GENERATION-SKIPPING TAX
Separate tax in addition to estate and gift taxes
1. Application: Transfers to recipients more than one generation below donor
a. Exception: Waived, if grandchild’s parent (donor’s child) predeceases the
donor
b. Exemption: $ for 201
2. Split Gifts: Husbands and wives may split gifts a. Gift by either spouse treated as one-half from each
b. Double exemption per donee
Independently answer MCQ 34-35. Notes:
Property Taxation
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MULTIPLE-CHOICE QUESTIONS 1. Data Corp., a calendar year corporation, purchased and placed into service office equipment
during November, Year 4. No other equipment was placed into service during the year. Data qualifies to use the general MACRS depreciation system. Data wants to take the largest deduction possible. What convention will Data use?
a. Full-year b. Half-year c. Mid-quarter d. Mid-month
(5749) 2. Which of the following conditions must be satisfied for a taxpayer to expense, in the year of
purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?
I. The property must be purchased for use in the taxpayer’s active trade or business. II. The property must be purchased from an unrelated party.
a. I only b. II only c. Both I and II d. Neither I nor II
(7008) 3. On August 1, Graham purchased and placed into service an office building costing $264,000
including $30,000 for the land. What was Graham’s MACRS deduction for the office building in that year?
a. $9,600 b. $6,000 c. $3,600 d. $2,250
(5423) 4. Capital assets include which of the following?
a. A corporation’s accounts receivable from the sale of its inventory b. Seven-year MACRS property used in a corporation’s trade or business c. A manufacturing company’s investment in U.S. Treasury bonds d. A corporate real estate developer’s unimproved land that is to be subdivided to build
homes, which will be sold to customers (5750)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
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5. On January 2, Year 3, Bates Corp. purchased and placed into service 7-year MACRS tangible
property costing $100,000. On December 31, Year 5, Bates sold the property for $102,000, after having taken $47,525 in MACRS depreciation deductions. What amount of the gain should Bates recapture as ordinary income?
a. $0 b. $2,000 c. $47,525 d. $49,525
(5011) 6. Archer Corp. sold machinery for $40,000 on December 31, Year 4. This machinery was
purchased on January 2, Year 1, for $34,000, and had an adjusted basis of $20,000 at the date of sale. For year 4, Archer should report a. Ordinary income of $6,000 and §1231 gain of $14,000 b. Ordinary income of $14,000 and §1231 gain of $6,000 c. Ordinary income of $20,000 d. §1231 gain of $20,000
(8037) 7. Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related
transactions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified?
Land Shed
a. Capital Capital b. Section 1231 Capital c. Capital Section 1231 d. Section 1231 Section 1231
(3351) 8. Rock, Inc. purchases the following assets during the year:
Computer $ 3,000 Computer desk 1,000 Office furniture 4,000 Delivery van 25,000
What should be reported as the cost basis for MACRS five-year property? a. $ 3,000 b. $25,000 c. $28,000 d. $33,000
(8460)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
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9. An individual had the following capital gains and losses for the year:
Short-term capital loss $70,000 Long-term gain (unrecaptured §1250 at 25%) 56,000 Collectibles gain (28% rate) 10,000 Long-term gain (15% rate) 20,000
What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)? a. Long-term gain of $16,000 at the 15% rate b. Short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the
15% rate c. Long-term capital gain of $3,000 at the 15% rate, collectibles gain of $10,000 at the 28%
rate, and Section 1250 gain of $56,000 at the 25% rate d. Short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the
15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate
(8461)
10. In Year 4, Bach sold a painting for $50,000 purchased for his personal use in Year 1 at a cost of $20,000. In Bach's Year 4 income tax return, the sale of the painting should be treated as a transaction resulting in a. No taxable gain b. Section 1231 (capital gain-ordinary loss rule) gain c. Long-term capital gain d. Ordinary income
(7643)
11. Which of the following items is a capital asset? a. An automobile for personal use b. Depreciable business property c. Accounts receivable for inventory sold d. Real property used in a trade or business
(8671)
12. A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (Gain from Dispositions of Certain Depreciable Property)? a. $13,000 b. $17,000 c. $20,000 d. $30,000
(8695)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
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13. Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain? a. $0 b. $7,000 c. $20,700 d. $27,700
(8696)
14. Baker Corp., a calendar year C corporation, realized taxable income of $36,000 from its regular business operations for calendar year 1. In addition, Baker had the following capital gains and losses:
Short-term capital gain $ 8,500 Short-term capital loss (4,000) Long-term capital gain 1,500 Long-term capital loss (3,500)
Baker did not realize any other capital gains or losses since it began operations. What is Baker’s total taxable income for Year 1?
a. $46,000 b. $42,000 c. $40,500 d. $38,500
(5751)
Item 15 and 16 are based on the following: In Year 1, Flora Ring bought a diamond necklace for her own use, at a cost of $10,000. In Year 4, when the fair market value was $12,000, Flora and her husband gave this necklace to her daughter, Ruth. No gift tax was due.
15. Ruth’s holding period for this gift
a. Starts in Year 4 b. Starts in Year 1 c. Depends on whether the necklace is sold by Ruth at a gain or at a loss d. Is irrelevant because Ruth received the necklace for no consideration of money or
money’s worth (1625)
16. If Ruth sells this diamond necklace in Year 4 for $13,000, Ruth’s recognized gain would be a. $3,000 b. $2,000 c. $1,000 d. $0
(1627)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
27
Item 17 and 18 are based on the following: On March 1, Year 7, Lois Wheat was bequeathed 1,000 shares of Lane Corp. common stock under the will of her uncle, Pat Prisy. Pat had paid $5,000 for the Lane stock in Year 2. Fair market value of the Lane stock on March 1, Year 7, the date of Pat’s death, was $8,000 and had increased to $11,000 six months later. The executor of Pat’s estate elected the alternate valuation date for estate tax purposes. Lois sold the Lane stock for $9,000 on May 1, Year 7, the date that the executor distributed the stock to her.
17. How much should Lois include in her individual income tax return for the inheritance of the
1,000 shares of Lane stock which she received from Pat’s estate?
a. $0 b. $5,000 c. $8,000 d. $11,000
(1635)
18. Lois’ basis for gain or loss on sale of the 1,000 shares of Lane stock is
a. $5,000 b. $8,000 c. $9,000 d. $11,000
(8035)
19. Hall was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for the stock ten years ago. Fair market value of the stock on February 1, Year 1, the date of his father’s death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, Year 1, the date that the executor distributed the stock to him. How much income should Hall include in his individual income tax return for the inheritance of the 500 shares of stock which he received from his father’s estate?
a. $5,500 b. $4,000 c. $2,500 d. $0
(4637)
20. On June 1, Year 1, Ben Rork sold 500 shares of Kul Corp. stock. Rork had received this stock on May 1 as a bequest from the estate of his uncle, who died on March 1, Year 1. Rork’s basis was determined by reference to the stock’s fair market value on March 1 Year 1. Rork’s holding period for this stock was
a. Short-term b. Long-term c. Short-term if sold at a gain; long-term if sold at a loss d. Long-term if sold at a gain; short-term if sold at a loss
(1618)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
28
21. Patty Leave owned an apartment house for ten years. Depreciation was taken on a straight-line basis. When Patty’s adjusted basis for this property was $300,000, she traded it for an office building having a fair market value of $700,000. The apartment house has 100 dwelling units, while the office building has 40 units rented to business enterprises. The properties are not located in the same city. What is Patty’s reportable gain on this exchange? a. $400,000 Section 1250 gain b. $400,000 Section 1231 gain c. $400,000 long-term capital gain d. $0
(1630)
22. Wright exchanged investment real property, with an adjusted basis of $80,000 and subject to a mortgage of $35,000, and received from Lloyd $15,000 cash and other investment real property having a fair market value of $125,000. Lloyd assumed the mortgage. What is Wright’s recognized gain in the year of exchange on the exchange? a. $15,000 b. $35,000 c. $45,000 d. $50,000
(8038)
Item 23 and 24 are based on the following: Conner purchased 300 shares of Zinco stock for $30,000 in Year 3. On May 23, Year 5, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during Year 3. On July 26, Year 5, Alice sold the 300 shares of Zinco for $25,000.
23. What amount of the loss from the sale of Zinco stock can Conner deduct in Year 5?
a. $0 b. $3,000 c. $5,000 d. $10,000
(5421)
24. What was Alice’s recognized gain or loss on her sale? a. $5,000 long-term loss b. $5,000 long-term gain c. $5,000 short-term loss d. $0
(5422)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
29
25. An office building owned by Bob Elin was condemned by the state on January 2, Year 0. Bob received the condemnation award on March 1, Year 1. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Bob to acquire qualified replacement property? a. August 1, Year 2 b. January 2, Year 3 c. March 1, Year 4 d. December 31, Year 4
(8036)
26. Taylor owns 1,000 shares of Media Corporation common stock with a basis of $22,000 and a fair market value of $33,000. Media paid a nontaxable 10% common stock dividend. What is the basis for each share of Media common stock owned by Taylor after receipt of the dividend? a. $20 b. $22 c. $30 d. $33
(8431)
27. Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1? a. $5,000 b. $5,100 c. $10,000 d. $15,000
(8181)
28. Wynn, a single individual age 60, sold Wynn’s personal residence for $450,000. Wynn had owned Wynn’s residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is Wynn’s recognized gain from the sale of Wynn’s personal residence? a. $75,000 b. $50,000 c. $0 d. $200,000
(8855)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
30
29. Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. Citizen?
Unified credit
Credit for gift taxes paid on gifts made after 1976
a. Yes Yes b. No No c. No Yes d. Yes No
(3354)
30. Under the provisions of a decedent’s will, the following cash disbursements were made by the estate’s executor:
I. A charitable bequest to the American Red Cross II. Payment of the decedent’s funeral expenses
What deduction(s) is(are) allowable in determining the decedent’s taxable estate?
a. I only b. II only c. Both I and II d. Neither I nor II
(6537)
31. Proceeds of a life insurance policy payable to the estate’s executor, as the estate’s representative, are
a. Includible in the decedent’s gross estate only if the premiums had been paid by the insured
b. Includible in the decedent’s gross estate only if the policy was taken out within three years of the insured’s death under the “contemplation of death” rule
c. Never includable in the decedent’s gross estate d. Always includable in the decedent’s gross estate
(8048)
32. Following are the fair market values of Wald's assets at the date of death:
Personal effects and jewelry $ 150,000 Land bought by Wald with Wald's funds five years prior
to death and held with Wald's sister as joint tenants with right of survivorship
1,800,000
The executor of Wald's estate did not elect the alternate valuation date. The amount includible as Wald's gross estate in the federal estate tax return is
a. $150,000 b. $1,150,000 c. $1,800,000 d. $1,950,000
(1707)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
31
33. Under the unified rate schedule, a. Lifetime taxable gifts are taxed on a noncumulative basis. b. Transfers at death are taxed on a noncumulative basis. c. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis. d. The gift tax rates are 5% higher than the estate tax rates.
(2485)
34. The annual per-donee gift tax exclusion was $13,000 in 2011. Jan, an unmarried individual, gave the following outright gifts in 2011:
Donee Amount Use by Donee
Jones $20,000 Down payment on house Craig 20,000 College tuition Kande 5,000 Vacation trip
Jan’s 2011 exclusions for gift tax purposes total a. $39,000 b. $31,000 c. $20,000 d. $13,000
(1705)
35. Which of the following payments would require the donor to file a gift tax return? a. $30,000 to a university for a spouse’s tuition b. $40,000 to a university for a cousin’s room and board c. $50,000 to a hospital for a parent’s medical expenses d. $80,000 to a physician for a friend’s surgery
(8886)
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
32
SIMULATIONS
Richard Norton had a net loss before any MACRS depreciation and Section 179 deduction on his farm operations for year 1. Richard elected out of all applicable bonus depreciation allowances, if any, and did not elect the straight-line method of depreciation. Calculate the depreciation on Richard’s farm assets for year 1 using the information in the table below and the 150% MACRS tables found by clicking the tab marked RESOURCES. Note that any property used in a farming business cannot be depreciated using the 200% declining balance method under MACRS for tax purposes. (9572)
In cells F2 and F3, enter the appropriate MACRS basis for each of the assets listed. In cells G2 and G3, calculate and enter the year 1 MACRS depreciation for each asset. The total year 1 MACRS depreciation will automatically calculate in cell G4.
Note: To use a formula in the spreadsheet, it must be preceded by an equal sign, e.g., =B1 +B2.
A B C D E F G
Date placed in service Asset Cost Life Section 179
elected MACRS basis
Year 1 MACRS depreciation
1
1. January 1, year 1 Truck 44,000 5 years - 2
2. January 1, year 1 Combine 60,000 7 years 3
Total MACRS depreciation, year 1 4
Richard Norton had net income of $200,000 before any MACRS depreciation and Section 179 deduction on his farm operations for year 2. In the shaded cells below, answer the following questions related to Richard’s $25,000 Section 179 deduction elected in year 1.
A G
3. How much is allowed in year 1 for tax purposes? 1
4. How much is allowed in year 2for tax purposes? 2
Richard had net farm income for year 2 of $200,000 before the MACRS depreciation and Section 179 deduction. On November 1, year 2, Richard purchased a new truck, and on November 30, year 2, Richard sold an old truck. The new truck was the only asset purchased during the year. Richard did not elect any Section 179 deduction for year 2. Calculate the depreciation on Richard’s farm assets shown below for year 2 using the information provided and the 150% MACRS tables found by clicking the tab marked RESOURCES. Enter your answers in the shaded spaces provided. The total year 2 MACRS depreciation will automatically calculate in cell G5.
A B C D E F G
Date placed in service Asset Cost Life Section 179 elected in
year 1
Section 179 elected in
year 2
Year 2 MACRS depreciation
1
5. January 1, year 1 Old Truck 44,000 5 years 0 0 2
6. January 1, year 1 Combine 60,000 7 years 0 3
7. November 1, year 2 New truck 65,000 5 years 0 0 4
Total MACRS depreciation, year 2 5
Property Taxation
￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣
33
MACRS Table (half-year convention 150 percent declining-balance method)
MACRS Table (mid-quarter convention 150 percent declining-balance method)
Property placed in service in First Quarter
Depreciation rate for recovery period Depreciation rate for recovery period
Year 3 years 5 years 7 years 10 years Year 3 years 5 years 7 years 10 years
1 25.00% 15.00% 10.71% 7.50% 1 43.75% 26.25% 18.75% 13.13%
2 37.50% 25.50% 19.13% 13.88% 2 28.13% 22.13% 17.41% 13.03%
3 25.00% 17.85% 15.03% 11.79% 3 25.00% 16.52% 13.68% 11.08%
4 12.50% 16.66% 25.25% 10.02% 4 3.12% 16.52% 12.16% 9.41%
5 16.66% 25.25% 8.74% 5 16.52% 12.16% 8.71%
6 8.33% 25.25% 8.74% 6 2.06% 12.16% 8.71%
7 25.25% 8.74% 7 12.16% 8.71%
8 6.13% 8.74% 8 1.52% 8.71%
9 8.74% 9 8.71%
10 8.74% 10 8.71%
11 4.37% 11 1.09%
MACRS Table (mid-quarter convention 150 percent declining-balance method)
Property placed in service in Second Quarter
MACRS Table (mid-quarter convention 150 percent declining-balance method)
Property placed in service in Third Quarter
Depreciation rate for recovery period Depreciation rate for recovery period
Year 3 years 5 years 7 years 10 years Year 3 years 5 years 7 years 10 years
1 31.25% 18.75% 13.39% 9.38% 1 18.75% 11.25% 8.04% 5.63%
2 34.38% 24.38% 18.56% 13.59% 2 40.63% 28.63% 19.71% 14.16%
3 25.00% 17.06% 14.58% 11.55% 3 25.00% 18.64% 15.48% 12.03%
4 9.37% 16.76% 12.22% 9.82% 4 15.62% 16.56% 12.27% 10.23%
5 16.76% 12.22% 8.73% 5 16.57% 12.28% 8.75%
6 6.29% 12.22% 8.73% 6 10.35% 12.27% 8.75%
7 12.22% 8.73% 7 12.28% 8.75%
8 4.58% 8.73% 8 7.67% 8.74%
9 8.73% 9 8.75%
10 8.73% 10 8.74%
11 3.28% 11 5.47%
MACRS Table (mid-quarter convention 150 percent declining-balance method)
Property placed in service in Fourth Quarter
Depreciation rate for recovery period
Year 3 years 5 years 7 years 10 years
1 6.25% 3.75% 2.68% 1.88%
2 46.88% 28.88% 20.85% 14.72%
3 25.00% 20.21% 16.39% 12.51%
4 21.87% 16.40% 12.87% 10.63%
5 16.41% 12.18% 9.04%
6 14.35% 12.18% 8.72%
7 12.19% 8.72%
8 10.66% 8.72%
9 8.72%
10 8.71%
11 7.63%