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

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Question 1

True/False

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Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.

A) True
B) False

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Question 2

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For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.

A) True
B) False

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Question 3

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A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% of net long- term capital gain or 0%/15%/20% of net long-term capital gain.

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

Tom has owned 40 shares of Orange Corporation stock for five years.He sells the stock short for a total of $1,100. One month later, he closes the short sale by purchasing and delivering 40 shares of Orange Corporation stock for a total of $600.Tom has a $500 short-term capital gain.

Since the Code section that defines capital asset says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.

Confusingly, §1221 defines what is not a capital asset.

On January 18, 2018, Martha purchased 200 shares of Blue Corporation stock for $2,000.On November 11, 2019, she sold short 200 shares of Blue stock, which she borrowed from her broker for $2,300.On February 10, 2020, Martha closed the short sale by delivering the 200 shares of Blue stock which she had acquired in 2018.On that date, Blue stock had a market price of $4 per share.What is Martha's recognized gain or loss and its character in 2019? In 2020?

Individuals who are not professional real estate developers may get capital gain treatment for the sale of their real property if they engage only in limited development activities.

On June 1, 2019, Brady purchased an option to buy 1,000 shares of General, Inc.at $40 per share.He purchased the option for $3,000.It was to remain in effect for five months.The market experienced a decline during the latter part of the year, so Brady decided to let the option lapse as of December 1, 2019.On his 2019 tax return, what should Brady report?

Section 1231 property generally does not include artistic compositions.

Tan, Inc., sold a forklift on April 12, 2019, for $8,000 (its FMV) to its 100% shareholder, Ashley.Tan's adjusted basis for the forklift was $12,000.Ashley's holding period for the forklift:

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless.The taxpayer is single and the loss is $30,000.The loss is treated as an ordinary loss.

The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.

Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill) that are eligible for amortization and held for more than one year.

Red Company had an involuntary conversion on December 23, 2019.The machinery had been acquired on April 1, 2017, for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event, Red initially has:

Which of the following statements is correct?

Blue Company sold machinery for $45,000 on December 23, 2019.The machinery had been acquired on April 1, 2017, for $69,000 and its adjusted basis was $34,200.The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:

The maximum § 1245 depreciation recapture generally equals the accumulated depreciation.

Harold is a head of household, has $27,000 of taxable income in 2019 from noncapital gain or loss sources, and has the following capital gains and losses: What is Harold's taxable income and the tax on that taxable income (ignore the standard deduction)?