ACC 570
Chapter 14 Solutions
71.
Net § 1231 gains must jump a final hurdle before being netted with capital transactions.
The net § 1231 gain must exceed the sum of nonrecaptured net § 1231 losses
recognized in the five most recent preceding years. The years 2005 through 2007 have
a combined nonrecaptured net § 1231 loss of $83,000. The $83,000 nonrecaptured §
1231 loss is partially absorbed by the 2008 $42,000 § 1231 gain and the 2009 $30,000 §
1231 gain. Thus, $11,000 of the nonrecaptured § 1231 loss remains for offset against
the 2010 $41,000 § 1231 gain.
Year
2005
2006
2007
2008
2009
2010
73.
a.
Ordinary
(18,000)
(33,000)
(32,000)
42,000
30,000
11,000
-0-030,000
Gray has $42,000 of ordinary income due to § 1245 recapture and $7,000 of §
1231 loss.
Asset
Sold For
Less Adjusted Basis
Gain or Loss
Character
Rack
$75,000
$30,000 ($100,000 –
$70,000)
$45,000
All ordinary
income due
to § 1245
recapture
$5,000
$12,000 ($35,000 –
$23,000)
($7,000)
§ 1231 loss
$60,000
$53,000 ($87,000 –
$34,000)
$7,000
All ordinary
income due
to § 1245.
Forklift
Bin
b.
Capital
Since Gray does not have a net §1231 gain, none of the gains are capital.
76.
a.
Store cost
2006 cost recovery rate
2007 cost recovery rate
2008 cost recovery rate
2009 cost recovery rate
2010 cost recovery rate (.02564 × 5.5/12)
Total recovery rate
Total cost recovery
Adjusted basis ($400,000 – $41,032) of building
b.
Selling price
Adjusted basis ($358,968 + $100,000)
Recognized loss
$400,000
.01391
.02564
.02564
.02564
.01175
×.10258
$ 41,032
$358,968
$385,000
(458,968)
($ 73,968)
Since the retail store building was real estate used in business, it is a § 1231 asset.
None of the loss is § 1250 gain because the property was sold for a loss.
Therefore, all of the loss is § 1231 loss, and there is no unrecaptured § 1250 gain.
pp. 14-41 to 14-44
BONUS! What if the store was sold for $550,000
Selling price
Adjusted basis ($358,968 + $100,000)
Recognized gain (§1231)
$550,000
(458,968)
$ 91,032
78.
a.
Land:
Condemnation proceeds
Allocable basis
Realized and recognized § 1231 loss
$25,000
(40,000)
($15,000)
Truck:
Depreciation taken: $3,491 ($6,000 – $2,509).
Adjusted basis: $2,509.
Realized gain: $3,500 – $2,509 = $991.
Recognized gain: $991 ordinary income under § 1245.
Rowing machine:
Realized and recognized gain = Amount realized – Adjusted basis of
machine on date of sale = $3,900 – $0 = $3,900.
Section 1245 recapture = Amount of depreciation claimed ($5,200) or gain
recognized ($3,900), whichever is less = $3,900.
Apartment building:
Realized gain = Amount realized – Adjusted basis = $200,000 – $124,783 =
$75,217.
Section 1231 gain recognized = $75,217. No § 1250 recapture is recognized
because the taxpayer used the straight-line method of depreciation. Of the
$75,217 § 1231 gain, $25,217 is unrecaptured § 1250 gain because the
depreciation taken of $25,217 ($150,000 cost – $124,783 basis) is less than
the $75,217 recognized gain.
Yacht:
Personal casualty loss (without regard to the 10% of AGI limitation) = Fair
market value at date of theft – Insurance proceeds – Floor = $19,600 –
$12,500 – $100 = $7,000.
Auto:
Realized loss = Amount realized – Adjusted basis = $9,600 – $20,800 =
$11,200. The loss relates to a personal use asset. Therefore, it is not
recognized.
Trampoline:
$6,000 business casualty loss is deductible for AGI. The casualty loss is
measured by the adjusted basis of the property at the time of the theft. There
is no $100 or 10% of AGI floor for a business casualty.
Section
b.
Item
Land
Truck
Rowing machine
Building
Yacht
Auto
Trampoline
Recognized
Gain/Loss
($15,000)
991
3,900
75,217
(7,000)
-0(6,000)
Section
1245
Recapture
Casualty and
Theft Loss
1231
Gain
($15,000)
$ 991
3,900
75,217
($7,000)
(6,000)
$4,891
Ordinary
income
Adjusted gross income computation:
Other sources
Ordinary income from depreciation recapture, as above
Long-term capital gain, as above
Business casualty loss, as above
Adjusted gross income
$60,217
$6,000 Net
Gain:
business loss
Receives
for AGI;
LTCG
No Net
treatment
personal loss
**
from AGI*
$402,000
4,891
60,217
(6,000)
$461,108
*None of the personal use activity property casualty loss is deductible from AGI because
10% of the $461,108 AGI is greater than the casualty loss of $7,000.
**Of the $60,217 §1231 gain, $25,217 is unrecaptured § 1250 gain. Thus, the $60,217 §
1231 gain is comprised of $25,217 of unrecaptured § 1250 gain (i.e., 25% gain) and
$35,000 of 0%/15% gain.
79.
a.
If the property is residential real property, the gain is all § 1231
Selling price of building
Cost of building
Total depreciation
Adjusted basis
Gain on sale
$89,000
$50,000
(12,000)
(38,000)
$51,000
25% gain (unrecaptured § 1250)
15% gain
$12,000
$39,000
b. Residential rental buildings acquired in 1986 were eligible for ACRS. If ACRS was
used, §1250 would recapture the excess depreciation as ordinary income. Since
buildings acquired after 1986 must use straight-line depreciation, no recapture exists.
BONUS! LET’S REWORK PART A FOR A C CORPORATION.
Selling price of building
Cost of building
Total depreciation
Adjusted basis
Gain on sale
$89,000
$50,000
(12,000)
§ 1250 ordinary income =
§ 291 additional recapture 20% x remaining gain, up to $12,000
of gain (20% x 12,000)
Balance of gain = § 1231 gain
(38,000)
$51,000
$ 0
2,400
48,600
38.
54.
77.
All the assets are capital assets because they do not fit any of the items listed in § 1221
as not capital assets. The antique truck is a ‘‘collectible. Therefore, the $5,000 loss
($42,000 sale price – $47,000 basis) is a long-term capital loss that would first be netted
against any 28% long-term capital gain. The Blue Growth Fund $16,000 gain ($28,000
sale price – $12,000 basis) is a long-term capital gain that is potentially taxable at 0%
and/or 15%. The Orange bonds are sold for a $7,250 gain ($42,000 proceeds – $750
interest income – $34,000 basis). The gain is a long-term capital gain potentially taxable
at 0% and/or 15%. The sale of the Green stock results in a $2,000 ($11,000 sale price –
$13,000 basis) short-term capital loss because the stock was held one year or less. The
$750 interest income is includible in Eric’s gross income pp. 14-4, 14-5, and 14-20 to 1425
The holding period of property received in a like-kind exchange includes the holding
period of the property given up if the property given up is a capital asset or a § 1231
asset. The vacant land held by Cherie was held for investment; therefore, it was a
capital asset. Consequently, the holding period for the apartment building begins on
April 10, 2006, the date the vacant land was acquired by Cherie. The holding period of
the apartment building was long term when it was sold on November 22, 2010. p. 14-16
a.
The gain on the sale of the building is subject to § 1250 depreciation recapture
because it is residential real estate acquired after 1975 and before January 1,
1987, on which accelerated depreciation was taken. The gain from the sale is
$345,000, $0 is ordinary income due to § 1250, and there is $345,000 § 1231
gain.
Selling price of building
Cost of building
1986–2005 accelerated depreciation
(1.000 × $350,000)
2006–2010 depreciation
Jan. 20, 2010 adjusted basis
Gain on sale
1986–2005 straight-line depreciation
($350,000 × 1.0)
Additional depreciation ($350,000 – $350,000)
Remaining gain
b.
$345,000
$350,000
(350,000)
(–0–)
(–0–)
$345,000
$350,000
(–0–)
$345,000
The land is also a § 1231 asset because it was part of the residential real estate.
However, there is no recapture because it was not depreciated. The § 1231 gain
from the sale of the land is $400,000 ($500,000 selling price – $100,000 adjusted
basis). pp. 14-38 to 14-41 and 14-45
81.
The property is a § 1231 asset for Harriet because it is depreciable property used in her
business and held more than a year. At the time of the gift to Harriet, the property has
§ 1245 depreciation recapture potential equal to the depreciation taken by the donor of
$67,000. Harriet could not depreciate the property because the carryover basis to her
was zero. When she sells the property for $13,000, the entire gain is § 1245 depreciation
recapture gain because of the “taint” when she received the property. p. 14-46 and
Example 63
82.
The property is a § 1231 asset for Trent because it is depreciable property used in his
business and held more than a year. Trent’s basis for the asset is its fair market value at
the date of his father’s death, or $432,000. The father’s depreciation recapture taint is
extinguished at the father’s death. However, Trent takes $123,000 of the depreciation
after acquiring the property. Trent has a gain of $73,000 [$382,000 sales price in 2010 –
($432,000 basis equal to fair market value at father’s death – $123,000 depreciation
taken by Trent)], all of which is treated as ordinary income due to § 1245. pp. 14-40 and
14-46
83.
When depreciable tangible property is contributed to charity, the contribution is limited to
the fair market value of the property reduced by the § 1245 depreciation recapture
potential. Since the depreciation recapture potential ($400,000) is greater than the fair
market value at the date of gift ($233,000), there is no charitable contribution deduction.
p. 14-46
84.
The corporation has a carryover of Dedriea’s basis and depreciation recapture potential
because this is a “tax-free” incorporation contribution. The property had an adjusted
basis of $135,000 ($566,000 cost – $431,000 depreciation) at the date of contribution. It
had an adjusted basis of $35,000 ($135,000 – $100,000 corporate depreciation) at the
time of its sale. The $53,000 gain ($88,000 – $35,000) is all recaptured as ordinary
income by § 1245. pp. 14-40 and 14-47
85.
Magenta’s distribution of the property as a dividend to its shareholder is a taxable
transaction for Magenta. Magenta had a zero adjusted basis for the property; it took
$100,000 (the property’s cost) of deprecation on it. The entire $40,000 fair market value
at the date of distribution is taxable as ordinary income due to § 1245 depreciation
recapture. pp. 14-40 and 14-48