Chapter 3 Solutibs

Chapter 10 - Property: Dispositions
Chapter 10
Property: Dispositions
SOLUTIONS MANUAL
Discussion Questions:
1. [LO 1] Compare and contrast different ways in which a taxpayer triggers a realization
event by disposing of an asset.
A realization event for tax purposes is created in many ways. Virtually any
disposal will result in a sale or other disposition. These include a sale, trade,
gift to charity, disposal to the landfill, or destruction in a natural disaster. In a
sale or trade (exchange), the taxpayer receives something of value in return for
the asset. In contrast, a charitable contribution, disposal, or destruction from a
natural disaster generally results in a loss of any remaining basis in the asset
without compensation (unless reimbursed by insurance).
2. [LO 1] Potomac Corporation wants to sell a warehouse that it has used in its business
for 10 years. Potomac is asking $450,000 for the property. The warehouse is subject
to a mortgage of $125,000. If Potomac accepts Wyden Inc.’s offer to give Potomac
$325,000 in cash and assume full responsibility for the mortgage on the property,
what amount does Potomac realize on the sale?
When the property disposed of is subject to a liability and the buyer assumes
the liability, the relief of debt increases the amount realized. Thus, Potomac’s
amount realized consists of $450,000, which is cash of $325,000 plus $125,000
relief of debt. This assumes that the buyer hypothetically transfers cash to the
seller in order to pay off the mortgage.
3. [LO 1] Montana Max sells a 2,500-acre ranch for $1,000,000 in cash, a note
receivable of $1,000,000, and debt relief of $2,400,000. He also pays selling
commissions of $60,000. In addition, Max agrees to build a new barn on the property
(cost $250,000) and spend $100,000 upgrading the fence on the property before the
sale. What is Max’s amount realized on the sale?
Anything received by the seller during a sale or exchange is included in the

amount realized. Most dispositions result in cash to the seller. However,
amount realized includes, but is not limited to, cash, the fair market value of
any other property received (e.g. marketable securities or a similar asset), or
relief of debt. In addition, selling expenses reduce the amount realized.
Therefore, Max’s amount realized includes the $1,000,000 of cash, $1,000,000
note receivable, relief of debt of $2,400,000, and is reduced by selling
commissions of $60,000 (selling expenses reduce the amount realized, S.C.
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Chapin, CA-8, 50-1 USTC ¶9171). Anything the seller gives up in the
transaction is added to
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the basis of the property given up and is not considered part of the amount
realized. Therefore, the barn and fence improvements are not considered part
of Max’s amount realized. Note, however, that making these improvements
decreases his realized gain by increasing Montana Max’s adjusted basis in the
property due to the improvements.
4. [LO 1] Hawkeye sold farming equipment for $55,000. It bought the equipment four
years ago for $75,000, and it has since claimed a total of $42,000 in depreciation
deductions against the asset. Explain how to calculate Hawkeye’s adjusted basis in
the farming equipment.
Hawkeye will calculate its adjusted basis in the farming equipment by reducing
the historical cost by any cost recovery deductions taken—namely,
depreciation. Therefore, Hawkeye’s adjusted basis is $33,000 ($75,000 less
$42,000). The tax adjusted basis is usually different than the book adjusted
basis. This is because most assets use a different recovery period, cost recovery
method (e.g. double declining balance), and convention (e.g. half-year) for tax
than for book purposes. See Chapter 9 for how these differences arise. Due to
the difference in cost recovery deductions, the adjusted basis is likely different
unless the asset is fully depreciated for both book and tax purposes.
5. [LO 1] When a taxpayer sells an asset, what is the difference between realized and
recognized gain or loss on the sale?
The realized gain or loss is simply the amount realized less the adjusted basis of
the asset sold. Every sale or disposition results in a realized gain or loss
(unless, of course, the amount realized is equal to the adjusted basis). Most
realized gains or losses become recognized gains or losses and are included on
the taxpayer’s tax return and increases (or decreases in the case of a loss) the
taxpayer’s taxable income and subsequent tax. However, there are some
realized gains or losses that are excluded from income or deferred to a later
time period.
6. [LO 2] What does it mean to characterize a gain or loss? Why is characterizing a

gain or loss important?
Once a gain or loss is recognized, a taxpayer must determine how the

recognized gain or loss affects the taxpayer’s tax liability. The character
depends on a combination of two factors: purpose or use of the asset and
holding period. The purpose or use of the asset is important because the law
does not treat all assets equally. The general use categories are: (1) trade or
business, (2) for the production of income (rental activities), (3) investment, and
(4) personal. Based on these criteria, we can categorize an asset into one of
three groups: (1) ordinary, (2) capital, or (3) section 1231. Characterizing the
gain or loss is important because all gains and losses are not equal. Ordinary
gains and losses are taxed at ordinary income rates, regardless of the holding
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period. Capital gains on assets held for more than a year receive preferential
rates while capital gains on assets held for one year or less do not. Section
1231 gains and losses receive the best of both worlds—the gains become long-
term capital gains and the losses become ordinary. However, to qualify as a
1231 asset, the asset must be used in a trade or business for more than a year.
7. [LO 2] Explain the difference between ordinary, capital, and §1231 assets.
An ordinary asset is an asset that is held for sale in the ordinary course of a
taxpayer’s business (e.g. inventory) or arises from sales in the ordinary course
of business (e.g. accounts receivable). Capital assets are held for investment
(expecting appreciation) or are personal-use assets (e.g. a taxpayer’s personal
belongings). A §1231 assets is used in a trade or business or for the production
of income and is held for more than one year. An asset that is used in a trade
or business or for the production of income and is held for one year or less is
an ordinary asset. Gains on personal use property are capital gains while
losses are non-deductible.
8. [LO 2] Discuss the reasons why individuals generally prefer capital gains over
ordinary gains. Explain why corporate taxpayers might prefer capital gains over
ordinary gains.
Individual taxpayers prefer capital gains because they can be taxed at

preferential rates. Long-term capital gains are taxed at preferential rates (5 or
15%). Short-term capital gains are simply taxed at ordinary rates. Capital
gains can offset capital losses, while ordinary gains cannot. Additionally,
individual taxpayers can offset $3,000 of net capital losses against ordinary
income and carry the remaining capital loss forward indefinitely.
Even though corporate taxpayers are taxed at the same rate on ordinary
income and capital gains, they prefer capital gains because capital gains can
offset capital losses. Capital losses cannot be used to offset ordinary income.
Corporate taxpayers can carry capital losses back three years and forward five
years. However, after the carry back and carry forward periods expire, capital
losses expire and are worthless.
9. [LO 2] Dakota Conrad owns a parcel of land he would like to sell. Describe the
circumstances in which the sale of the land would generate §1231 gain or loss,
ordinary gain or loss, or capital gain or loss. Also describe the circumstances where
Dakota would not be allowed to deduct a loss on the sale.
The parcel of land could qualify as a capital asset if it is held by Dakota as an

investment (e.g. the purpose for holding the land is for expected appreciation in
value). The land could qualify as a §1231 asset if Dakota uses it in a trade or
business such as a sole-proprietorship or for the production of income (a rental
property) and he uses it for these purposes for more than one year. The land
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could be ordinary income property to Dakota if it is held in a trade or business

or for the production of income for one year or less or if it is considered to be
inventory (for example a real-estate dealer). The loss would be non-deductible
to Dakota if he held the land for personal-use purposes.
10. [LO 2] Lincoln has used a piece of land in her business for the past five years. The
land qualifies as §1231 property. It is unclear whether Lincoln will have to recognize
a gain or loss when she eventually sells the asset. She asks her accountant how the
gain or loss would be characterized if she decides to sell. Her accountant said that
selling §1231 assets gives sellers “the best of both worlds.” Explain what her
accountant means by “the best of both worlds.”
An asset qualifies as a §1231 asset if used in a trade or business or held for the
production of income for more than one year. The tax treatment is sometimes
described as receiving “the best of both worlds” because if they result in gains,
the gain will receive capital gain treatment and if they result in losses the loss
will receive ordinary loss treatment. Capital gains are preferable because they
are taxed at a preferential rate (for non-corporate taxpayers) and can offset
capital losses which cannot always be offset against ordinary income.
Ordinary losses are preferred to capital losses because they offset ordinary
income in the current year rather than being accumulated to offset future
capital gains.
11. [LO 3] Explain Congress’s rationale for depreciation recapture.
The purpose of depreciation recapture is to treat the gain on the sale of

depreciable assets as ordinary income to the extent the gain is attributable to
depreciation (or other cost recovery deductions). This is because the MACRS
system liberally allows accelerated deductions which often decrease the basis of
an asset faster than the real economic decline in value. Thus, depreciation
deductions may give rise to artificial gain on the disposition of depreciable
assets. It is important to note that depreciation recapture does not affect the
amount of the gain; rather it affects only the character of the gain.
Additionally, depreciation recapture only applies to sales or dispositions
resulting in gains (e.g. it does not apply to losses).
12. [LO 3] Compare and contrast §1245 depreciation recapture and §1250 depreciation
recapture.
§1245, sometimes referred to as full recapture, generally applies only to

tangible personal property. §1245 recaptures the lesser of the realized gain or
the depreciation taken on the asset as ordinary income—thus the full amount of
the gain may be recaptured. §1250, sometimes referred to as partial recapture,
applies only to real property depreciated under accelerated depreciation
methods—the term partial recapture indicates that only the depreciation in
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excess of straight-line method is recaptured. §1250 recapture no longer

applies. This is because real property has been depreciated under the straight-
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line method since 1987. Property placed in service before 1987 is now fully
depreciated, regardless of whether accelerated or straight-line methods were
used; as a result, there is no excess depreciation to recapture. However,
section 291 and unrecaptured section 1250 applies to gains on real property for
corporations and non-corporate taxpayers, respectively.
13. [LO 3] Why is depreciation recapture not required when assets are sold at a loss?
When an asset is sold for less than the adjusted basis (basis less cost recovery),
there is no depreciation recapture. This is because the real economic value of
the asset declined faster than it was depreciated for tax purposes. Therefore,
the loss is simply the recovery of the remaining basis in the asset. Depreciation
recapture is intended to classify any gain due to prior depreciation as ordinary
in character.
14. [LO 3] What are the similarities and differences between the tax benefit rule and
depreciation recapture?
Conceptually, both depreciation recapture and the tax benefit doctrine require
a taxpayer to take into income an amount deducted in a prior year. However,
depreciation recapture only recharacterizes the already existing gain from
§1231 to ordinary because the taxpayer received an ordinary deduction in the
past and requires the amount to be included into ordinary income in the year of
sale. Depreciation recapture does not change the amount of the gain. In
contrast, the tax benefit doctrine requires a taxpayer to take into income an
amount received when an expense was taken in a prior year. For example, if a
taxpayer deducts (receives a benefit) state income taxes paid during the year
paid, but receives a tax refund in a subsequent year, the taxpayer must include
the refund into income.
15. [LO 3, 4] Are both corporations and individuals subject to depreciation recapture
when they sell depreciable real property at a gain? Explain.
Both taxpayers used to be subject to §1250 recapture when selling real

property. However, because there is no longer any accelerated depreciation on
real property, there is no longer any §1250 recapture. However, real property
sold at a gain is still subject to other types of recapture rules. Corporate
taxpayers are subject to §291 recapture and non-corporate taxpayers are
subject to unrecaptured §1250 rules.
Section 291 requires corporate taxpayers to recapture 20% of the lesser of the
gain realized or accumulated depreciation taken. The recaptured portion of the
gain is taxed as ordinary income. The remaining gain is §1231 gain.
Non-corporate taxpayers must recognize the lesser of the gain realized or the
accumulated depreciation taken as unrecaptured §1250 gain. Unrecaptured
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§1250 gain is still §1231 (not ordinary) gain, but it will be taxed at a maximum
rate of 25% gain (taxed at the taxpayer’s marginal rate at a maximum 25%).
The remaining gain is §1231 gain.
16. [LO 4] How is unrecaptured §1250 gain for individuals similar to depreciation
recapture? How is it different?
Unrecaptured §1250 gain is similar to depreciation recapture in that the lesser of

accumulated depreciation or the gain realized on the sale is separated from the
§1231 gain. The difference is that the amount is taxed at a taxpayer’s ordinary
rate up to a maximum rate of 25 percent; whereas depreciation recapture is taxed
at ordinary rates with no maximum rate.
17. [LO 4] Explain why gains from depreciable property sold to a related taxpayer are
treated as ordinary income under §1239.
Section 1239 requires gains on depreciable property sold to related taxpayers to

be taxed at ordinary rates because the basis of these assets will be recovered
through ordinary depreciation deductions. This rule effectively is like reverse
depreciation recapture in that it taxes future depreciation at ordinary rates rather
than past depreciation at ordinary rates. The related party definition includes
family relationships including siblings, spouses, ancestors, and lineal
descendants. It also includes an individual and a corporation if the individual
owns more than 50% of the stock of the corporation
18. [LO 5] Bingaman Resources sold two depreciable §1231 assets during the year. One
asset resulted in a large gain (the asset was sold for more than it was purchased for)
and the other resulted in a small loss. Describe the §1231 netting process for
Bingaman.
Bingaman would first determine the gain or loss on each asset. For the gain
asset, depreciation recapture would recharacterize the gain as ordinary to the
extent of depreciation allowed. The remaining gain (the amount in excess of
the original basis) would be a §1231 gain that would enter the netting process.
The loss from the other asset would enter the netting process as well. The
§1231 gain and loss would be offset. If the result was a gain, Bingaman would
apply the §1231 look-back rule. After applying the look-back rule, any
remaining gain would become treated as a long-term capital gain and enter the
capital gains netting process. If the result of the initial §1231 netting process
was a loss, the gains and losses would be treated as ordinary gains and losses.
19. [LO 5] Jeraldine believes that when the §1231 look-back rule applies, the taxpayer
deducts a §1231 loss in a previous year against §1231 gains in the current year.
Explain whether Jeraldine’s description is correct.
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Jeraldine’s description is incorrect. The §1231 look-back rule simply

recharacterizes §1231 gain into ordinary gain. This is done to the extent that
prior §1231 losses in the prior 5 years received ordinary loss treatment.
Jeraldine is correct in that the §1231 gains in the current year are offset
against prior §1231 losses—to the extent they haven’t been recaptured through
the §1231 look-back rule in prior years.
20. [LO 5] Explain the purpose behind the §1231 look-back rule?
The favorable rules of §1231 allow a taxpayer to treat a net §1231 loss as an
ordinary loss. The §1231 look-back rule applies when a taxpayer has a net
§1231 gain for the year which will receive capital gain treatment. The rule
recharacterizes the gain to ordinary to the extent the taxpayer received
favorable ordinary loss treatment in the prior five years (that have not yet been
recaptured). This prevents arbitrage of taxpayers timing their sales of loss
assets in one year to receive ordinary treatment and selling their gains in a
subsequent year to obtain capital gain treatment.
Without the look-back rule, taxpayers could separate the years in which it sells
its gain and loss assets. For example, a taxpayer could sell its loss asset on
December 31, year 1 and sell its gain asset on January 1, year 2. This would
allow the loss asset to receive ordinary treatment and be offset against ordinary
income. The gain asset would be treated as a long-term capital gain, which
would be taxed at preferential rates by non-corporate taxpayers.
21. [LO 5] Does a taxpayer apply the §1231 look-back rule in a year when the taxpayer
recognizes a net §1231 loss? Explain.
The look-back rule exists to prevent game playing (arbitrage) opportunities. It

prevents taxpayers from selling their §1231 loss assets in one year and receiving
ordinary loss treatment and then selling their §1231 gain assets in a subsequent
year and receiving capital gain treatment. However, if the taxpayer does not
have a net §1231 gain in the subsequent years, it can be assumed they are not
manipulating the situation and the look-back rule does not apply to a year in
which there is a net §1231 loss.
22. [LO 5] How would you describe the application of the §1231 look-back rule to a
friend who knows little about taxation?
The §1231 look-back rule affects only the character of the gain. It requires that
any net §1231 gain become ordinary rather than capital to the extent that there
are prior unrecaptured losses in the prior five years that received the
preferential ordinary loss treatment. This is done to offset the benefit of
receiving ordinary loss treatment in any of the past five years.
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23. [LO 4, 5] Describe the circumstances in which an individual taxpayer with a net
§1231 gain will have different portions of the gain taxed at different rates.
Non-corporate taxpayers can have §1231 gains taxed at different capital gains
rates. Most §1231 gains (from tangible personal property and land) will give
rise to regular long-term capital gain which will be taxed at a maximum rate of
15% (5% if the taxpayer has a marginal rate of 15% or less). The §1231 gains
from real property that are referred to as unrecaptured §1250 gains will be
taxed a maximum rate of 25% (e.g. at
the taxpayer’s marginal rate unless his rate exceeds 25%). Thus, non-
corporate taxpayer’s can have §1231 gains and, thus, long-term capital gains
that are taxed at two rates.
Additionally, a taxpayer who crosses from the 15% to the 25% marginal tax
rate bracket would see capital gains preferential rates increase from 5% to
15%.
24. [LO 6] Rocky and Bullwinkle Partnership sold a parcel of land during the current
year and realized a gain of $250,000. Rocky and Bullwinkle did not recognize gain
related to the sale of the land on its tax return. Is this possible? Explain how a
taxpayer could realize a gain but not recognize it.
A realized gain or loss is usually recognized in the year of disposition.

However, there are some realized gains or losses that are excluded from
taxable income (e.g. gain from the sale of a principal residence—see chapter 14
for a detailed discussion) or deferred (e.g. like-kind exchange or related-party
loss), or partially deferred (e.g. an installment sale).
25. [LO 6] Why does Congress allow taxpayers to defer gains on like-kind exchanges?
How do the tax laws ensure that the gains (or losses) are deferred and not
permanently excluded from a taxpayer’s income?
In a like-kind exchange, a taxpayer maintains an investment in an asset other

than cash and therefore does not have the wherewithal to pay–that is, the
taxpayer does not have the means to pay taxes currently. However, in a like-
kind exchange where boot (non-like kind property) is received, there is a partial
recognition of gain for the transaction.
The gains are deferred through receiving a carryover basis in the like-kind
property received. This defers the gain until the like-kind property received is
disposed of rather than permanently excluding the gain from income.
26. [LO 6] Compare and contrast the like-kind property requirements for real property
and for personal property for purposes of qualifying for a like-kind exchange.
Explain whether a car held by a corporation for delivering documents will qualify as
like-kind property with a car held by an individual for personal use.
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For real property, any two pieces of property qualify as like-kind property for
purposes of a like-kind exchange. For example, a New York City skyscraper
(relatively little land with relatively substantial building) will qualify as like-kind
with a Montana ranch (relatively substantial land holding with relatively little
buildings). For personal property to qualify as like-kind, it must have the same
general use as defined as the same asset class in Revenue Procedure 87-56.
The cars held by both taxpayers belong to the same asset class and would qualify
as like-kind property for purposes of a like-kind exchange for the corporation.
While the assets are like-kind, the exchange will not qualify as like-kind for the
individual because the asset was not used in a trade or business or for the
production of income—a requirement of qualifying for a like-kind exchange.
27. [LO 6] Salazar Inc., a Colorado company, is relocating to a nearby town. It would
like to trade its real property for some real property in the new location. While
Salazar has found several prospective buyers for its real property and has also located
several properties that are acceptable in the new location, it cannot find anyone that is
willing to trade Salazar Inc. for its property in a like-kind exchange. Explain how a
third-party intermediary could facilitate Salazar’s like-kind exchange.
If Salazar completed the transaction by selling its old property to one of the
prospective buyers and then used the cash to purchase one of the acceptable new
properties, it would not be able to take advantage of the like-kind exchange
provisions. A third-party intermediary can take control of Salazar’s property,
sell the property to one of the prospective buyers, and use the cash proceeds to
acquire Salazar’s desired property. As a result, use of a third party intermediary
allows Salazar to accomplish what it cannot do on its own (piece together a
transaction that qualifies as a like-kind exchange). However, Salazar must
identify the property to be received within 45 days and actually receive the
property within 180 days of transferring their property to the third party.
28. [LO 6] Minuteman wants to enter into a like-kind exchange by exchanging its old
New England manufacturing facility for a ranch in Wyoming. Minuteman is using a
third-party intermediary to facilitate the exchange. The purchaser of the
manufacturing facility wants to complete the transaction immediately but, for various
reasons, the ranch transaction will not be completed for three to four months. Will
this delay cause a problem for Minuteman’s desire to accomplish this through a like-
kind exchange? Explain.
Minuteman can still qualify for a Starker (deferred) exchange as long it meets
two timing requirements applicable to like-kind exchanges. First, within 45 days
of transferring the property to be given up (New England manufacturing facility)
in an exchange, the taxpayer must identify like-kind property to be received
(Wyoming ranch). Second, within 180 days of initially transferring the property
to be given up in a like-kind exchange, the taxpayer must receive the replacement
like-kind property. In addition, Minuteman must use a third party intermediary to
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hold the proceeds from the manufacturing facility until the ranch can be closed.
The exchange will qualify as long as the new ranch is acquired within the 180
day period following the close of the New England manufacturing facility.
29. [LO 6] Olympia Corporation, of Kittery, Maine, wants to exchange its manufacturing
machinery for Bangor Company’s machinery. Both parties agree that that Olympia’s
machinery is worth $100,000 and that Bangor’s machinery is worth $95,000.
Olympia would like the transaction to qualify as a like-kind exchange. What could
the parties do to equalize the value exchanged but still allow the exchange to qualify
as a like-kind exchange? How would the necessary change affect the tax
consequences of the transaction?
Olympia could also receive cash or another asset (boot), to equalize the
transaction. The receipt of boot does not jeopardize the like-kind exchange
treatment. However, Olympia will recognize gain equal to the boot received in
the transaction. Any remaining gain is still deferred under the like-kind exchange
rules. Boot includes any non-like kind asset: cash, tangible assets, intangibles,
etc.
30. [LO 6] Compare and contrast the similarities and differences between like-kind
exchanges and involuntary conversions for tax purposes?
A like-kind exchange involves a trade for a similar asset within the specified time
period. An involuntary conversion is the replacement of property damaged
through a natural disaster, theft, etc. The two transaction are similar in that they
both lack (at least a portion of) the wherewithal to pay the tax and thus result in a
deferral or partial deferral. The transactions differ in that the definition of
qualifying property is narrower for involuntary conversions than for like-kind
exchanges.
31. [LO 6] What is an installment sale? How do the tax laws ensure that taxpayers
recognize all the gain they realize on an installment sale? How is depreciation
recapture treated in an installment sale? Explain the gross profit ratio and how it
relates to gains recognized under installment method sales.
Installment sales comprise a sale when any portion of the proceeds is received in
a year subsequent to the disposition. The rules require that the realized gain be
recognized ratably as payments are received--unless the taxpayer elects out of the
installment method. Therefore, for each dollar received, a portion is return of
capital and a portion is the recognition of previously realized gain. Depreciation
recapture is required to be recognized in the year of disposition. The recaptured
amount is excluded from the gross profit ratio to avoid double taxation (e.g. the
gain realized is reduced by the depreciation recapture recognized). The gross
profit ratio reflects the percentage of: (Gain Realized / Amount Realized. The
gross profit ratio is used to determine how much of each of these payments will be
recognized as gain in the year that the payment is received.
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32. [LO6] Mr. Kyle owns stock in a local publicly traded company. Although the stock
price has declined since he purchased it two years ago, he likes the long-term
prospects for the company. If Kyle sells the stock to his sister because he needs some
cash for a down payment on a new home, is the loss deductible? If Kyle is right and
the stock price increases in the future, how is his sister’s gain computed if she sells
the stock?
A related party loss is deferred until the time when the asset is sold by the
related purchaser to an unrelated party. Since Kyle sold the stock at a loss to
his sister, Kyle’s loss is disallowed. When the stock is sold at a gain, the
sister can reduce her gain by the amount of Kyle’s disallowed loss. If the
stock continues to decline in value, the disallowed loss is never recognized for
tax purposes.
Problems
33. [LO 1] Rafael sold an asset to Jamal. What is Rafael’s amount realized on the sale in
each of the following alternative scenarios?
a. Rafael received $80,000 of cash and a vehicle worth $10,000. Rafael also pays
$5,000 in selling expenses.
b. Rafael received $80,000 of cash and was relieved of a $30,000 mortgage on the
asset he sold to Jamal. Rafael also paid a commission of $5,000 on the
transaction.
c. Rafael received $20,000 of cash, a parcel of land worth $50,000, and marketable
securities of $10,000. Rafael also paid a commission of $8,000 on the transaction.
a. $85,000, computed as follows:
Property Received Amount Explanation

(1) Cash $80,000 Given
(2) Vehicle 10,000 Given
(3) Commissions (5,000) Given
Amount Realized $85,000 (1) + (2) + (3)
b. $105,000, computed as follows:

(1) Cash $80,000
(2) Relief of debt 30,000
(3) Commissions (5,000)
Amount Realized $105,000 (1) + (2) + (3)
c. $72,000, computed as follows:
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(1) Cash $20,000
(2) Land 50,000
(3) Marketable securities 10,000
(4) Commissions (8,000)
Amount Realized $72,000 (1) + (2) + (3) + (4)
34. [LO 1] Shasta Corporation sold a piece of land to Bill for $45,000. Shasta bought the
land two years ago for $30,600. What gain or loss does Shasta realize on the
transaction?
$14,400, computed as follows:

Description Amount Explanation
(1) Amount Realized $45,000
(2) Adjusted Basis 30,600
Gain (Loss) Realized $14,400 (1) – (2)
35. [LO 1] Lassen Corporation sold a machine to a machine dealer for $25,000. Lassen
bought the machine for $55,000 and has claimed $15,000 of depreciation expense on
the machine. What gain or loss does Lassen realize on the transaction?
($15,000) loss, computed as follows:

(1) Amount Realized $25,000 Given
(2) Adjusted Basis 40,000 $55,000 original basis - $15,000
accumulated depreciation
Gain (Loss) Realized ($15,000) (1) – (2)
36. [LO 2] Identify each of White Corporation’s following assets as an ordinary, capital,
or §1231 asset.
a. Two years ago, White used its excess cash to purchase a piece of land as an
investment.
b. Two years ago, White purchased land and a warehouse. It uses these assets in its
business.
c. Manufacturing machinery White purchased earlier this year.
d. Inventory White purchased 13 months ago, but is ready to be shipped to a
customer.
e. Office equipment White has used in its business for the past three years.
f. 1,000 shares of stock in Black corporation that White purchased two years ago
because it was a good investment.
g. Account receivable from a customer with terms 2/10 net 30.
h. Machinery White held for three years and then sold at a loss of $10,000.
a. Capital, because it is held for investment.
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b. The land and building are both §1231 property because White uses the assets
in its trade or business and has held the assets property for more than a year.
c. Ordinary, the property is ordinary even though it is used in a trade or
business because it has been held for less than one year. Once White has held
the machinery for more than a year, it will become §1231 property.
d. Ordinary, inventory is held in the ordinary course of business.
e. §1231, the property is used in a trade or business and held for more than one
year.
f. Capital, because it is held for investment.
g. Ordinary, accounts receivable are created in the ordinary course of business.
h. §1231, the property is used in a trade or business and held for more than one
year.
37. [LO 3, 4] In year 0, Canon purchased a machine to use in its business for $56,000. In
year 3, Canon sold the machine for $42,000. Between the date of the purchase and
the date of the sale, Canon depreciated the machine by $32,000.
a. What is the amount and character of the gain Canon will recognize on the
sale, assuming that it is a partnership?
b. What is the amount and character of the gain Canon will recognize on the
sale, assuming that it is a corporation?
c. What is the amount and character of the gain Canon will recognize on the
sale, assuming that it is a corporation and the sale proceeds were increased to
$60,000?
d. What is the amount and character of the gain Canon will recognize on the
sale, assuming that it is a corporation and the sale proceeds were decreased to
$20,000?
a. $18,000 ordinary income, computed as follows:

(2) Original Basis 56,000 Given
(3) Accumulated Depreciation (32,000) Given
(4) Adjusted Basis 24,000 (2) + (3)
(5) Gain/(Loss) Recognized $18,000 (1) – (4)
(6) Ordinary income (§1245 depreciation
recapture) $18,000 Lesser of (3) or (5)
§1231 gain $0 (5) – (6)
Because the entire gain is caused by depreciation deductions, the entire gain is
treated as ordinary income under §1245.
10-16
b. There is no difference in calculating the amount and character of the gain

between a partnership and a corporation on §1245 property.
c. $36,000 of income ($32,000 ordinary and $4,000 §1231) computed as follows:

(4) Adjusted Basis 24,000 (2) + (3)
§1231 gain $4,000 (5) – (6)
Only the gain caused by depreciation is treated as ordinary income under §1245,
the remaining gain is §1231.
d. ($4,000) ordinary loss, computed as follows:

(4) Adjusted Basis 24,000 (2) + (3)
(5) Gain/(Loss) Recognized ($4,000) (1) – (4)
recapture) $0 Lesser of (3) or (5)
§1231 loss ($4,000) (5) – (6)
Only gains are treated as ordinary income under §1245, any loss is §1231.
38. [LO 3, 4] In year 0, Longworth Partnership purchased a machine for $40,000 to use in
its business. In year 3, Longworth sold the machine for $35,000. Between the date of
the purchase and the date of the sale, Longworth depreciated the machine by $22,000.
a. What is the amount and character of the gain Longworth will recognize on the
sale?
b. What is the amount and character of the gain Longworth will recognize on the
sale if the sale proceeds were increased to $45,000?
10-17
c. What is the amount and character of the gain Longworth will recognize on the
sale if the sale proceeds were decreased to $15,000?
a. $17,000 ordinary income.

(3) Accumulated Depreciation 22,000 Given
(4) Adjusted Basis 18,000 (2) - (3)
(6) Ordinary income (§1245 depreciation recapture) $17,000 Lesser of (3) or (5)
§1231 gain $0 (5) – (6)
Because the entire gain is caused by depreciation deductions, the entire gain is treated as
ordinary income under §1245.
b. $27,000 of income ($22,000 ordinary and $5,000 §1231) computed as follows:

(4) Adjusted Basis 18,000 (2) - (3)
(6) Ordinary income (§1245 depreciation recapture) $22,000 Lesser of (3) or (5)
§1231 gain $5,000 (5) – (6)
Only the gain caused by depreciation is treated as ordinary income under §1245, the
remaining gain is §1231.
c. ($3,000) ordinary loss, computed as follows:

(4) Adjusted Basis 18,000 (2) - (3)
10-18
($3,000
(5) Gain/(Loss) Recognized ) (1) – (4)
(6) Ordinary income (§1245 depreciation recapture) $0 Lesser of (3) or (5)
($3,000
§1231 loss ) (5) – (6)
Only gains are treated as ordinary income under §1245, any loss is §1231.
39. [LO 3, 4] On August 1 of year 0, Dirksen purchased a machine for $20,000 to use in
its business. On December 4 of year 0, Dirksen sold the machine for $18,000.
a. What is the amount and character of the gain Dirksen will recognize on the
sale?
b. What is the amount and character of the gain Dirksen will recognize on the
sale if the machine was sold on January 15 of year 1 instead?
a. ($2,000) ordinary loss.

(3) Accumulated Depreciation $0 *
(4) Adjusted Basis 20,000 (2) - (3)
($2,000
(5) Gain/(Loss) Recognized ) (1) – (4)
($2,000
Ordinary loss ) (5) – (6)
No depreciation is allowed on an asset placed in service and disposed of during the same
taxable year. Assets held less than one year are ordinary rather than section 1231
assets.
b. $5,200 ordinary income.

(3) Accumulated Depreciation $5,307 Calculated below
(4) Adjusted Basis 14,693 (2) - (3)
(6) Ordinary income* $3,307 Lesser of (3) or (5)
§1231 gain $0 (5) – (6)
*Assets held less than one year are ordinary rather than section 1231 assets.
10-19
Depreciation Calculations
(1) (2) (1) x (2)
Original
Year Basis Rate Depreciation
1 $20,000 14.29% $2,858
12.245 $2,449
2 $20,000 %*
$5,307
*12.245% = 24.49% x .5 (half-year in year of
disposition)
40. [LO 3, 4] Rayburn Corporation has a building that it bought during year 0 for
$850,000. It sold the building in year 5. During the time it held the building Rayburn
depreciated it by $100,000. What is the amount and character of the gain or loss
Rayburn will recognize on the sale in each of the following alternative situations?
a. Rayburn receives $840,000.

b. Rayburn receives $900,000.
c. Rayburn receives $700,000.
a. $18,000 ordinary income and $72,000 §1231 gain computed as follows:

(4) Adjusted Basis 750,000 (2) – (3)
(6) §291 recapture percentage 20% §291
(7) §291 recapture base 90,000 Lesser of (5) or (3)
(8) §291 recapture (ordinary income) $18,000 (6) x (7)
§1231 gain $72,000 (5) – (8)
b. $20,000 ordinary income and $130,000 §1231 gain computed as follows:

10-20

(4) Adjusted Basis 750,000 (2) – (3)
§1231 gain $130,000 (5) – (8)
c. $(50,000) ordinary loss computed as follows:

(4) Adjusted Basis 750,000 (2) – (3)
(7) §291 recapture base $0 Lesser of (5) or (3)
(8) §291 recapture (ordinary income) $0 (6) x (7)
§1231 loss ($50,000) (5) – (8)
41. [LO 3, 4] Moran owns a building he bought during year 0 for $150,000. He sold the
building in year 6. During the time he held the building he depreciated it by $32,000.
What is the amount and character of the gain or loss Moran will recognize on the sale
in each of the following alternative situations?
a. Moran received $145,000.

b. Moran received $170,000.
c. Moran received $110,000.
a. $27,000 unrecaptured section 1250 gain, which is section 1231 gain taxed at
maximum rate of 25%, computed as follows:
10-21
Amount Explanatio
Description n
(4) Adjusted Basis 118,000 (2) – (3)
(6) Unrecaptured §1250 gain (and Lesser of (5)
§1231 gain) $27,000 or (3)
(7) Remaining §1231 gain $0 (5) – (6)
Total §1231 gain $27,000 (6) + (7)
b. §1231 gain of $52,000. Of the $52,000, $32,000 is unrecaptured §1250 gain

subject to a maximum 25% tax rate and the remaining $20,000 is §1231 gain
subject to a maximum rate of 15%. See the following calculations:

(4) Adjusted Basis 118,000 (2) – (3)
(6) Unrecaptured §1250 gain Lesser of (5) or (3)
(and §1231 gain) $32,000
(7) Remaining §1231 gain 20,000 (5) – (6)
Total §1231 gain $52,000 (6) + (7)
c. §1231 loss of ($8,000), calculated as follows:

10-22
(4) Adjusted Basis 118,000 (2) – (3)

(6) Unrecaptured §1250 gain Lesser of (5) or (3)
(and §1231 gain) $0
(7) Remaining §1231 loss ($8,000) (5) – (6)
Total §1231 loss ($8,000) (6) + (7)
42. [LO 3, 4, 5] Hart, an individual, bought an asset for $500,000 and has claimed
$100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of
30 percent. Answer the questions presented in the following alternative scenarios
(assume Hart had no property transactions other than those described in the problem):
a. What is the amount and character of Hart’s recognized gain if the asset is
tangible personal property sold for $450,000? What effect does the sale have
on Hart’s tax liability for the year?
b. What is the amount and character of Hart’s recognized gain if the asset is
on Hart’s tax liability for the year
c. What is the amount and character of Hart’s recognized gain if the asset is
on Hart’s tax liability for the year?
d. What is the amount and character of Hart’s recognized gain if the asset is a
non-residential building sold for $450,000? What effect does the sale have on
Hart’s tax liability for the year?
e. Now assume that Hart is a corporation. What is the amount and character of
its recognized gain if the asset is a nonresidential building sold for $450,000?
What effect does the sale have on Hart’s tax liability for the year (assume the
same 30 percent marginal tax rate)?
f. Now assuming that the asset is real property, which entity type should be used
to minimize the taxes paid on real estate gains?
a. $50,000 ordinary income and a $15,000 tax liability on income, computed as

follows:

(100,000 Given
(3) Accumulated Depreciation )
(4) Adjusted Basis 400,000 (2) + (3)
10-23

§1231 gain $0 (5) – (6)
Character Amount (1) Rate (2) Tax (1) x (2)

§1245 recapture $50,000 30% $15,000
§1231 gain $0 15% $0
Tax $15,000
b. Hart has $100,000 ordinary income and $50,000 of §1231 gain. Hart’s tax
liability is $37,500, calculated as follows:

(100,000 Given
(3) Accumulated Depreciation )
(4) Adjusted Basis 400,000 (2)+ (3)
§1231 gain $50,000 (5) – (6)
Rate Tax (1) x

Character Amount (2) (2)
§1245 $100,00
recapture 0 30% $30,000
§1231 gain $50,000 15% $7,500
Tax $37,500
c. Hart has a §1231 loss of $50,000 and receives tax savings of $15,000 for the
loss:

(4) Adjusted Basis 400,000 (2) + (3)
§1231 loss ($50,000) (5) – (6)
10-24
Rate Tax (1) x

Character Amount (2) (2)
§1245
recapture $0 30% $0
($50,000
§1231 loss ) 30% ($15,000)
Tax benefit ($15,000)
d. Hart has a §1231 gain of $50,000 taxed at a maximum 25% rate. Hart’s tax

(4) Adjusted Basis 400,000 (2)+ (3)
(5) Gain/(Loss) Recognized 50,000 (1) – (4)
(6) Unrecaptured §1250 gain $50,000 Lesser of (5) or (3)
(7) Remaining §1231 gain $0 (5) – (6)
Total §1231 gain $50,000 (6) + (7)
Amoun Rat
Character t e Tax
Unrecaptured §1250 (§1231 $50,00 25 $12,50
gain) 0 % 0
15
Other §1231 gain $0 % $0
$12,50
Tax 0
e. Hart recognizes $10,000 ordinary income and $40,000 §1231 gain. Hart’s tax

(4) Adjusted Basis 400,000 (2) + (3)
10-25
§1231 gain $40,000 (5) – (8)
Character Amount Rate Tax

§291gain $10,000 30% $3,000
§1231 gain $40,000 30% $12,000
Tax $15,000
f. As can be seen from parts (d) and (e), any noncorporate form will result in a
lower tax on sales of real property. This is because unrecaptured §1250 gain is
taxed at a maximum rate of 25 percent for noncorporate taxpayers while
corporate taxpayers recognize ordinary gains.
43. [LO 4] Luke sold a building and the parcel of land the building is built on to his
brother at fair market value. The fair market value of the building was determined to
be $325,000; Luke built the building several years ago at a cost of $200,000. Luke
had claimed $45,000 of depreciation expense on the building. The fair market value
of the land was determined to be $210,000; Luke purchased the land many years ago
for $130,000. Luke’s brother will use the building in his business.
a. What is the amount and character of Luke’s recognized gain or loss on the
building?
b. What is the amount and character of Luke’s recognized gain or loss on the land?
a. $170,000 ordinary income, computed as follows:

(4) Adjusted Basis 155,000 (2) + (3)
Ordinary Gain/(Loss) Recognized under §1239* $170,000 (1) – (4)
*Luke must recognize ordinary income on the sale of the building under §1239 because
(1) he sold it at a gain to a related party (his brother) and (2) the asset is a depreciable
asset in the hands of the related party—because his brother will use the property in his
business, he is entitled to depreciate it.
b. What is the amount and character of Luke’s recognized gain or loss on the land?
$80,000 §1231 gain, computed as follows:
10-26

$210,00
(1) Amount Realized 0 Given
(3) Accumulated Depreciation 0 Given
(4) Adjusted Basis 130,000 (2) - (3)
§1231 Gain Recognized $80,000 (1) – (4)
44. [LO 5] Buckley, an individual, began business two years ago and has never sold a
§1231 asset. Buckley owned each of the assets for several years. In the current year,
Buckley sold the following business assets:
Accumulated
Asset Original Cost Depreciation Gain/Loss
Computers $6,000 $2,000 ($3,000)
Machinery $10,000 $4,000 ($2,000)
Furniture $20,000 $12,000 $7,000
Building $100,000 $10,000 ($1,000)
Assuming Buckley’s marginal ordinary income tax rate is 35 percent, answer the
questions for the following alternative scenarios:
a. What are Buckley’s gains or losses for the current year? What effect do the
gains or losses have on Buckley’s tax liability?
b. Assume that the amount realized increased so that the building was sold at a
$6,000 gain instead. What are Buckley’s gains or losses for the current year?
What effect do the gains and losses have on Buckley’s tax liability?
c. Assume that the amount realized increased so that the building was sold at a
$15,000 gain instead. What are Buckley’s gains or losses for the current year?
What effect do the gains and losses have on Buckley’s tax liability?
a. Buckley’s net §1245 gain is $7,000 and its net §1231 loss is $6,000 and is
calculated as follows:
Asset Description Amount

Computers §1231 loss* ($3,000)
Machinery §1231 loss* ($2,000)
Furniture §1245 recapture $7,000
Building §1231 loss* ($1,000)
*Because Buckley has only §1231 losses they become ordinary losses.
Amoun Rate Tax (1) x

Character t (2) (2)
§1245
recapture $7,000 35% $2,450
10-27
§1231 ($6,000 35 ($2,100

loss ) % )
Tax $350
b. Buckley’s net §1245 gain is $7,000 and its net §1231 gain is $1,000 and is

Building Unrecaptured §1250 gain** $6,000
**Unrecaptured §1250 gain is a §1231 gain taxed at a maximum rate of 25%

Character t (2) (2)
§1245
recapture $7,000 35% $2,450
Net §1231
gain* $1,000 25% $250
Tax $2,700
*An unrecaptured §1250 gain of $6,000 from the building is offset against §1231 losses
of ($5,000) (($3,000 from computer + ($2,000) from machinery), for a net §1231 gain of
$1,000.
c. Buckley’s net §1245 gain is $7,000 and its net §1231 gain is $10,000 and is

Building Unrecaptured §1250 gain** $10,000
Building §1231 gain $5,000
**Unrecaptured §1250 gain is a §1231 gain taxed at a maximum rate of 25%

Character t (2) (2)
§1245 recapture $7,000 35% $2,450
Unrecap. $10,00
§1250* 0 25% $2,500
Tax $4,950
10-28
*Buckley has an unrecaptured §1250 gain (a §1231 gain taxed at 25%) of $10,000 from
the building and a §1231 gain (taxed at 15%) of $5,000. The ($5,000) of §1231 losses
(($3,000 from computer + ($2,000) from machinery) is offset against the 15% taxed
§1231 gain first. Therefore, the unrecaptured §1250 gain of $10,000 remains.
10-29
45. [LO 5] {Planning} Aruna, a sole proprietor, wants to sell two assets that she no
longer needs for her business. Both assets qualify as §1231 assets. The first is
machinery and will generate a $10,000 §1231 loss on the sale. The second is land
that will generate a $7,000 §1231 gain on the sale. Aruna’s ordinary marginal tax
rate is 30 percent.
a. Assuming she sells both assets in December of year 1 (the current year), what
effect will the sales have on Aruna’s tax liability?
b. Assuming that Aruna sells the land in December of year 1 and the machinery
in January of year 2, what effect will the sales have on Aruna’s tax liability for
each year?
c. Explain why selling the assets in separate years will result in tax savings for
Aruna.
a. Aruna’s tax will decrease by ($900). Because there is a net §1231 loss, both the
gain and loss will be characterized as ordinary.
Rat
Character Amount e Tax
($10,000 30 ($3,000
§1231 loss-Ordinary ) % )
§1231 gain- 30
Ordinary $7,000 % $2,100
Tax ($900)
b. Aruna’s tax will decrease by ($1,950). Because the §1231 gain is recognized in
Year 1, the gain will be capital. The §1231 loss in Year 2 will be ordinary.
Rat
15
§1231 gain-Capital ( Year 1) $7,000 % $1,050
§1231 loss-Ordinary ( Year ($10,000 30 ($3,000
2) ) % )
($1,950
Tax )
c. The §1231 rules can be gamed if you understand them. First gains and losses are
netted. However, losses may offset ordinary income at the marginal tax rate,
while gains can be recognized at preferential rates which are lower than the
marginal tax rate. Second, the look-back rules prevent recognizing losses before
gains within a five-year period. However, gains may be recognized before losses.
If Aruna recognizes her gain before her loss, the §1231 look-book rules do not
apply.
46. [LO 5] Bourne Guitars, a corporation, reported a $157,000 net §1231 gain for year 6.
10-30
a. Assuming Bourne reported $50,000 of unrecaptured §1231 losses during years

1–5, what amount of Bourne’s net §1231 gain for year 6, if any, is treated as
ordinary income?
b. Assuming Bourne’s unrecaptured §1231 losses from years 1–5 were
$200,000, what amount of Bourne’s net §1231 gain for year 6, if any, is treated as
ordinary income?
10-31
a. $50,000 of Bourne’s gain would be ordinary income and the remaining

$107,000 gain is a §1231 gain, computed as follows:
$157,00
(1) Current §1231 gain 0 Given
(2) Unrecaptured §1231
losses $50,000 Given
Lesser of (1) or
(3) Ordinary income $50,000 (2)
$107,00
§1231 gain 0 (1) - (3)
b. The entire $157,000 gain would be ordinary income due to the unrecaptured
§1231 loss rule.
47. [LO 5] {Planning} Tonya Jefferson, a sole proprietor, runs a successful lobbying
business in Washington, D.C. She doesn’t sell many business assets, but she is
planning on retiring and selling her historic townhouse, which she runs her business
from, in order to buy a place somewhere sunny and warm. Tonya’s townhouse is
worth $1,000,000 and the land is worth another $1,000,000. The original basis in the
townhouse was $600,000, and she has claimed $250,000 of depreciation deductions
against the asset over the years. The original basis in the land was $500,000. Tonya
has located a buyer that would like to finalize the transaction in December of the
current year. Tonya’s marginal ordinary income tax rate is 35 percent.
a. What amount of gain or loss does Tonya recognize on the sale? What is the
character of the gain or loss? What effect does the gain and loss have on her
tax liability?
b. In additional to the original facts, assume that Tonya reports the following
unrecaptured 1231 loss:
Year Net §1231 Gains/(Losses)

Year 1 ($200,000)
Year 2 $0
Year 3 $0
Year 4 $0
Year 5 $0
Year 6 (current year) ?
What amount of gain or loss does Tonya recognize on the sale? What is the
character of the gain or loss? What effect does the gain or loss have on her year 6
(the current year) tax liability?
c. Assuming the unrecaptured 1231 loss in part (b), as Tonya’s tax advisor could
you make a suggestion as to when Tonya should sell the townhouse in order to
10-32
reduce her taxes? What would Tonya’s tax liability be if she adopts your
recommendation?
10-33
a. Tonya has a §1231 gain of $250,000 taxed at a maximum 25% rate. She
also has a §1231 gain of $900,000 ($400,000 from the building and $500,000
from the land) taxed at a maximum 15% rate. Tonya’s tax liability is
$197,500, calculated as follows:
Description of Building Sale Amount Explanation

$1,000,00 Given
(1) Amount Realized 0
(4) Adjusted Basis 350,000 (2)+ (3)
Lesser of (5) or
(6) Unrecaptured §1250 gain $250,000 (3)
(7) Remaining §1231 gain $400,000 (5) – (6)
Total §1231 gain $650,000 (6) + (7)
Description of Land Sale Amount Explanation

$1,000,00 Given
(3) Accumulated Depreciation (0) Given
(4) Adjusted Basis 500,000 (2)+ (3)
(5) §1231 Gain/(Loss) Recognized 500,000 (1) – (4)
Rat
Unrecaptured §1250 (§1231 $250,00 25
gain) 0 % $62,500
$900,00 15 $135,00
Other §1231 gain 0 % 0
$197,50
Tax 0
b. Tonya has an ordinary gain of $200,000, due to the §1231 look-back rule.
Tonya has a §1231 gain of $50,000 taxed at a maximum 25% rate (the other
$200,000 was recaptured as ordinary since it was the highest rate §1231
gain. She also has a §1231 gain of $900,000 ($400,000 from the building and
$500,000 from the land) taxed at a maximum 15% rate. Tonya’s tax liability
is $217,500, calculated as follows:

$1,000,00 Given
10-34
10-35

(4) Adjusted Basis 350,000 (2)+ (3)
Lesser of (5) or
(6) Unrecaptured §1250 gain $250,000 (3)
(7) Remaining §1231 gain $400,000 (5) – (6)
Total §1231 gain $650,000 (6) + (7)

$1,000,00 Given
(4) Adjusted Basis 500,000 (2)+ (3)
Year Net Recaptured/

§1231 gain Unrecaptured
(loss) §1231 losses Notes Ordinary LTCG
Year 1 ($200,000) $0 Loss is ordinary ($200,000)
($200,000) Unrecaptured losses
Year 2 $0 $0
Year 3 $0 $0
Year 4 $0 $0
Year 5 $0 $0
Year 6 $250,000 (25%) $200,000 $200,000 Ordinary $200,000 $50,000
$900,000 (15%) $0 $900,00
$0 Unrecaptured losses 0
Rat
$200,00 35
Ordinary 0 % $70,000
Unrecaptured §1250 (§1231 25
gain) $50,000 % $12,500
$900,00 15 $135,00
$217,50
Tax 0
10-36
c. Tonya’s unrecaptured §1231 loss is about to expire. If she delays the sale
of her townhouse until January of year 7, there is no longer any recapture
10-37
because unrecaptured §1231 losses only carry over for five years. This would
leave Tonya with the same result as part a. Tonya has a §1231 gain of
$250,000 taxed at a maximum 25% rate. She also has a §1231 gain of
$900,000 ($400,000 from the building and $500,000 from the land) taxed at a
maximum 15% rate. Tonya’s tax liability is $197,500, which is a savings of
$20,000 for waiting a few weeks to sell the asset.

§1231 gain Unrecaptured
Year 2 $0 $0
Year 3 $0 $0
Year 4 $0 $0
Year 5 $0 $0
Year 6 $0 Unrecaptured losses
$0 only carry over 5
years
Year 7 $250,000 (25%) $250,00
$900,000 (15%) 0
$900,00
0
Rat
Unrecaptured §1250 (§1231 $250,00 25
gain) 0 % $62,500
$900,00 15 $135,00
$197,50
Tax 0
48. [LO 5] Morgan’s Water World (MWW), an LLC, opened several years ago and
reports the following net §1231 gains and losses since it began business.

Year 1 ($11,000)
Year 2 $5,000
Year 3 ($21,000)
Year 4 ($4,000)
10-38
Year 5 $17,000
Year 6 ($43,000)
Year 7 (current year) $113,000
What amount, if any, of the year 7 $113,000 net §1231 gain is treated as ordinary
income?
10-39
After applying the §1231 five-year look back rule, the result is $57,000 ordinary income
and $56,000 long-term capital gain.
Net
Year §1231 Recaptured/
gain Unrecaptured
Year 2 $5,000 ($5,000) Gain is ordinary $5,000
Year 5 $17,000 $17,000 Gain is ordinary $17,000
Year 6 ($43,000) ($43,000) Loss is ordinary ($43,000)
Year 7 $113,000 $57,000 $57,000 is ordinary $57,000 $56,000
$0 No unrecaptured
losses
49. [LO 5] Han runs a sole proprietorship. Hans reported the following net §1231 gains
and losses since he began business:

Year 1 ($110,000)
Year 2 $15,000
Year 3 $0
Year 4 $0
Year 5 $10,000
Year 6 $0
Year 7 (current year) $50,000
a. What amount, if any, of the year 7 (current year) $50,000 net §1231 gain is
treated as ordinary income?
b. Assume, that the $50,000 net §1231 gain occurs in year 6 instead of year 7.
What amount of the gain would be treated as ordinary income in year 6?
a. After applying the §1231 five-year look back rule, the entire $50,000 is long-
term capital gain.
10-40

§1231 Unrecaptured
gain (loss)§1231 losses Notes Ordinary LTCG
Year 1 ($110,000 $0 Loss is ordinary ($110,000)
) ($110,000) Unrecaptured losses
Year 3 $0 $0
Year 4 $0 $0
Year 6 $0 $0 Unrecaptured losses
$0 only carryforward 5
years
Year 7 $50,000 $50,000 $50,000 is §1231 $50,000
$0
b. After applying the §1231 five-year look back rule, the entire $50,000 is
ordinary income.

§1231 Unrecaptured
gain (loss)§1231 losses Notes Ordinary LTCG
Year 1 ($110,000 $0 Loss is ordinary ($110,000)
) ($110,000) Unrecaptured losses
Year 3 $0 $0
Year 4 $0 $0
$0 Unrecaptured losses
only carryforward 5
years
50. [LO 6] Independence Corporation needs to replace some of the assets used in its trade
or business and is contemplating the following exchanges:
10-41
Exchange Asset Given Up by Asset Received by Independence

Independence
a Band saw Band saw
b Machinery used in textiles Machinery used for wood working
c Passenger automobile used for Heavy duty van that seats two and has a
deliveries large cargo box
d Large warehouse on two acres Small warehouse on twenty-two acres
e Office building in Green Bay, WI Apartment complex in Newport Beach,
used in the business CA, that will be held as an investment
Determine whether each exchange qualifies as a like-kind exchange. Also explain the
rationale for why each qualifies or does not qualify as a like-kind exchange.
Exchang Asset given up by Independence Asset received by Independence

e
a The exchange of a band saw for a band saw qualifies as a like-kind
exchange since they are tangible personal property having the same use
(contained in the same asset class).
b The exchange of machinery used in textiles for machinery used for wood
working does not qualify as a like-kind exchange because they are tangible
personal property that does not have the same use (not contained in the
same asset class).
c The exchange of passenger automobile for a heavy duty van does not qualify
as a like-kind exchange because the tangible personal property does not
have the same use (not contained in the same asset class).
d The exchange of a large warehouse on two acres for a small warehouse on
twenty-two acres qualifies as a like-kind exchange since they are both real
property.
e The exchange of the office building in Green Bay, WI for an apartment
complex in Newport Beach, CA qualifies as a like-kind exchange since they
are both real property that are either used in the business or held for
investment.
51. [LO 6] Kase, an individual, purchased some property in Potomac, Maryland, for
$150,000 approximately 10 years ago. Kase is approached by a real estate agent
representing a client who would like to exchange a parcel of land in North Carolina
for Kase’s Maryland property. Kase agrees to the exchange. What is Kase’s realized
gain or loss, recognized gain or loss, and basis in the North Carolina property in each
of the following alternative scenarios?
a. The transaction qualifies as a like-kind exchange and the fair market value of
each property is $675,000.
b. The transaction qualifies as a like-kind exchange and the fair market value of
each property is $100,000.
10-42
a. Even though Kase has a realized gain of $525,000, the recognized gain is $0
because the transaction qualifies as a like-kind exchange and Kase did not
10-43
b. receive any boot. Kase receives a carryover basis of $150,000 in the North
Carolina property (the same basis Kase had in the Maryland property). See
the following computation:

(1) Amount realized from machine $675,000 Given
(2) Amount realized from boot (non Given
like-kind property) $0
(3) Total amount realized $675,000 (1) + (2)
(4) Adjusted basis $150,000 Given
(5) Gain realized $525,000 (3) – (4)
(6) Gain recognized $0 Lesser of (2) or (5)
(7) Deferred gain $525,000 (5) – (6)
Adjusted basis in new property $150,000 (1) – (7)
c. Kase would have a realized loss of ($50,000), but the recognized loss would
be $0 because the transaction qualifies as a like-kind exchange. Kase would
receive a carryover basis of $150,000. See the following computation:

(1) Amount realized from machine $100,000 Given
(2) Amount realized from boot (cash) $0 Given
(4) Adjusted basis $150,000 Given
(5) Loss realized ($50,000) (3) – (4)
(6) Loss recognized $0 Lesser of (2) or (5)
(7) Deferred loss $50,000 (5) – (6)
Adjusted basis in new property $150,000 (1) + (7)
52. [LO 6] {Research} Longhaul Trucking traded two smaller trucks (each had a 10,000-
pound gross weight) for one larger truck (18,000-pound gross weight). Do the trucks
qualify as like-kind property to Longhaul (Hint: because the trucks are tangible
personal property they must be the same asset class to be like-kind assets). You
should use Rev. Proc. 87-56 to determine the asset classes for the trucks.
10-44
The smaller trucks and the larger truck are not like-kind assets. The smaller
trucks are asset class 00.241 (Light General Purpose Trucks) because they weigh
less than 13,000 pounds. The larger truck is asset class 00.242 (Heavy General
Purpose Trucks) because it weighs 13,000 pounds or more.
53. [LO 6] {Research} {Planning} Twinbrook Corporation needed to upgrade to a larger

manufacturing facility. Twinbrook first acquired a new manufacturing facility for
$2,100,000 cash, and then transferred the facility it was using (building and land) to
White Flint Corporation for $2,000,000 three months later. Does the exchange
qualify for like-kind exchange treatment (hint: examine Revenue Procedures 2000-37
and 2004-51)? If not, can you propose a change in the transaction that will allow it to
qualify?
Twinbrook’s exchange will not qualify as a parking transaction or reverse

Starker exchange. Initially, under Rev. Proc. 2000-37 it would have qualified.
However, Rev. Proc. 2004-51 modified the requirements, so that Twinbrook’s
transaction no longer qualifies.
Under Rev. Proc. 2004-51, the IRS will allow a taxpayer to place property with
an accommodation party until the taxpayer can arrange for an exchange.
Therefore, if Twinbrook gives the funds to a qualified intermediary who obtains
the new property and holds it until Twinbrook can arrange for the transfer of its
current property, the exchange will qualify as a Starker or deferred like-kind
exchange if the two timing requirements are met. First, the like-kind property to
be received is identified within 45 days [§1031(a)(3)(A)]. Second, the like-kind
property is received within 180 days of the transfer of the property given up
[§1031(a)(3)(B)(i)].
54. [LO 6] {Research} Woodley Park Corporation currently owns two parcels of land
(parcel 1 and parcel 2). It owns a warehouse facility on parcel 1. Woodley needs to
acquire a new and larger manufacturing facility. Woodley was approached by
Blazing Fast Construction (who specializes in prefabricated warehouses) about
acquiring Woodley’s existing warehouse on parcel 1. Woodley indicated that it
prefers to exchange its existing facility for a new and larger facility in a qualifying
like-kind exchange. Blazing Fast indicated that it could construct a new
manufacturing facility on parcel 2 to Woodley’s specification within four months.
Woodley and Blazing Fast agreed to the following arrangement. First, Blazing Fast
would construct the new warehouse on parcel 2 and then relinquish the property to
Woodley within four months. Woodley would then transfer the warehouse facility
and land parcel 1 to Blazing Fast. All of the property exchanged in the deal was
identified immediately and the construction was completed within 180 days. Does the
exchange of the new building for the old building and parcel 1 qualify as a like-kind
exchange (see DeCleene v. Commissioner, 115 TC 457)?
10-45
Even though Woodley is trading real property (old building and Parcel 1) for
real property (a new building constructed on Woodley’s Parcel 2), the exchange
does
10-46
not qualify as a like-kind exchange. Woodley’s facts are similar to those of two
cases—DeCleene v. Commissioner and Bloomington Coca-Cola Bottling Co. v.
Commissioner (51-1 USTC 9320). After applying the step transaction doctrine
the effect was Woodley purchasing a new facility, and not an exchange of
unimproved property for improved property, inasmuch as the taxpayer already
owned the land on which the new plant was constructed. Blazing Fast could not
be a party to an exchange with the taxpayer because the contractor was never the
owner of the property that the taxpayer received in the so-called exchange.
55. [LO 6] Metro Corp. traded machine A for machine B. Metro originally purchased
machine A for $50,000 and machine A’s adjusted basis was $25,000 at the time of the
exchange. What is Metro’s realized gain or loss, recognized gain or loss, and
adjusted basis in machine B in each of the following alternative scenarios?
a. The fair market value of machine A and of machine B is $40,000 at the time
of the exchange. The exchange does not qualify as a like-kind exchange.
b. The fair market value of machine A and of machine B is $40,000. The
exchange qualifies as a like-kind exchange
d. The fair market value of machine A is $35,000 and machine B is valued at
$40,000. Metro exchanges machine A and $5,000 cash for machine B.
Machine A and machine B are like-kind property.
e. The fair market value of machine A is $45,000 and Metro trades machine A
for machine B valued at $40,000 and $5,000 cash. Machine A and machine B
are like-kind property.
a. If the transaction does not qualify as a like kind exchange, Metro has a
realized and recognized gain of $15,000 ($40,000 amount realized minus
$25,000 adjusted basis). The basis in machine B is its $40,000 fair market
value.
b. Even though Metro has a realized gain of $15,000 ($40,000 - $25,000), the
recognized gain is $0 because the transaction qualifies as a like-kind
exchange. Metro receives a basis of $25,000 in machine B. See the
following computations:

(1) Amount realized from machine $40,000
(2) Amount realized from boot (cash) $0
(4) Adjusted basis $25,000 $50,000 - $25,000
(5) Gain realized $15,000 (3) – (4)
(7) Deferred gain $15,000 (5) – (6)
10-47
c. The realized gain is $10,000 and the recognized gain is $0. Metro’s basis
in machine B is $30,000. See the following computations:

(1) Amount realized from machine $40,000 Given in example
(2) Amount realized from boot (cash) $0 Given in example
$25,000 + $5,000
(4) Adjusted basis $30,000 cash
(5) Gain realized $10,000 (3) – (4)
(7) Deferred gain $10,000 (5) – (6)
d. Metro’s realized gain is $20,000 and its recognized gain is $5,000 (the
amount of the boot received) because the transaction qualifies as a like-kind
exchange. Metro’s basis in machine B is $25,000. See the following
computations:

(1) Amount realized from machine $40,000 Given in example
(2) Amount realized from boot (cash) $5,000 Given in example
(4) Adjusted basis $25,000 $50,000 - $25,000
(5) Gain realized $20,000 (3) – (4)
(6) Gain recognized $5,000 Lesser of (2) or (5)
(7) Deferred gain $15,000 (5) – (6)
56. [LO 6] Prater Inc. enters into an exchange in which it gives up its warehouse on 10
acres of land and receives a tract of land. A summary of the exchange is as follows:
10-48
Original Accumulated
Transferred FMV Basis Depreciation
Warehouse $300,000 $225,000 $45,000
Land $50,000 $50,000
$30,000
Mortgage on
warehouse
Cash $20,000 $20,000
Assets Received FMV

Land $340,000
What is Prater’s realized and recognized gain on the exchange and its basis in
the assets it received in the exchange?
Gain realized is $120,000, gain recognized is $10,000, and Prater’s adjusted basis in the
land is $230,000.

(1) Amount realized in like-kind $340,000 Given
(2) Amount realized from boot $30,000 Mortgage relief
$225,000 - $45,000 + $50,000
(4) Adjusted basis $250,000 + $20,000 (liability assumed)
(5) Gain Realized $120,000 (3) – (4)
Lesser of [(2) – liability
(6) Gain recognized $10,000 assumed] or (5)
(7) Deferred gain $110,000 (5) – (6)
*In this situation, Prater is relieved of $10,000 more debt than he assumed ($30,000
minus 20,000) because consideration given in the form of cash or other property is offset
against consideration received. Consequently, he is allowed to net the liabilities against
each other and he is treated as receiving only the $10,000 net liabilities he’s been
relieved of as boot.
57. [LO 6] Baker Corporation owned a building located in Kansas. Baker used the
building for its business operations. Last year a tornado hit the property and
completely destroyed it. This year, Baker received an insurance settlement. Baker
had originally purchased the building for $350,000 and had claimed a total of
$100,000 of depreciation deductions against the property. What is Baker’s realized
10-49
and recognized gain or (loss) on this transaction and what is its basis in the new building
in the following alternative scenarios?
a. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding

the building during the current year.
b. Baker received $450,000 in insurance proceeds and spent $500,000 rebuilding
c. Baker received $450,000 in insurance proceeds and spent $400,000 rebuilding
d. Baker received $450,000 in insurance proceeds and spent $450,000 rebuilding
the building during the next three years.
a. Because Baker reinvested all of the insurance proceeds, it will not recognize
any of its $200,000 realized gain. Baker’s basis in the new building is $250,000.
See the following calculations:

(1) Amount Realized $450,000 Insurance proceeds
(2) Adjusted Basis $250,000 $350,000 – 100,000 depreciation
(3) Gain Realized $200,000 (1) – (2)
(4) Insurance proceeds $450,000 (1)
(5) Proceeds reinvested $450,000 Given
(6) Amount not reinvested $0 (4) – (5)
(8) Deferred gain $200,000 (3) – (7)
(9) Value of replacement property $450,000 Given
Basis of replacement property $250,000 (9) – (8)
b. Because Baker reinvested all of the insurance proceeds, it will not recognize
any of its $200,000 realized gain. Baker’s basis in the new building is $300,000.
See the following calculations:

(3) Gain Realized $200,000 (1) – (2)
10-50

(6) Amount not reinvested $0 (4) – (5)
(8) Deferred gain $200,000 (3) – (7)
(9) Value of replacement property $500,000 $450,000 + $50,000
c. Because Baker reinvested only a portion of the insurance proceeds, it will

recognize $50,000 of its $200,000 realized gain. Baker’s basis in the new
building is $250,000. See the following calculations:

(3) Gain Realized $200,000 (1) – (2)
(6) Amount not reinvested $50,000 (4) – (5)
(8) Deferred gain $150,000 (3) – (7)
d. Because Baker took three years to replace the property destroyed in the
involuntary conversion, Baker will recognize all of its $200,000 realized gain.
Baker’s basis in the new building is $250,000. See the following calculations:

(3) Gain Realized $200,000 (1) – (2)
(5) Proceeds reinvested* $0 Given
10-51
(6) Amount not reinvested $450,000 (4) – (5)

(8) Deferred gain $0 (3) – (7)
*The proceeds were not reinvested within the two year time period; therefore, they are
not a qualified reinvestment.
58. [LO 6] Russell Corporation sold a parcel of land valued at $400,000. Its basis in the
land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a
note providing that Russell will receive $175,000 in year 1 and $175,000 in year 2
from the buyer.
a. What is Russell’s realized gain on the transaction?

b. What is Russell’s recognized gain in year 0, year 1, and year 2?
a. Russell’s realized gain is $125,000.
b. Its year 0 recognized gain is $15,625, its year 1 recognized gain is $54,688, and
its year 2 recognized gain is also $54,688. See the following calculations:

(2) Adjusted Basis $275,000 Given
(3) Gain Realized $125,000 (1) – (2)
(4) Gross Profit Percentage 31.25% (3) / (1)
(5) Payment received in year 0 $50,000 Given
Gain recognized in year 0 $15,625 (5) x (4)
Note that all of the $125,000 gain realized is recognized over the three year period.
10-52
59. [LO 6] In year 0, Javens, Inc. sold machinery with a fair market value of $400,000 to
Chris. The machinery’s original basis was $317,000 and Javens’s accumulated
depreciation on the machinery was $50,000, so its adjusted basis to Javens was
$267,000. Chris paid Javens $40,000 immediately (in year 0) and provided a note to
Javens indicating that Chris would pay Javens $60,000 a year for six years beginning
in year 1. What is the amount and character of the gain that Javens will recognize in
year 0? What amount and character of the gain will Javens recognize in years 1
through 6?
Javens recognizes $58,300 of income in year 0 ($50,000 ordinary income and $8,300 of
§1231 gain). It also recognizes $12,450 of §1231 gain each year from year 1 through
year 6, computed as follows:

(2) Original Basis $317,000 Given
(3) Accumulated Depreciation $50,000 Given
(4) Adjusted Basis $267,000 (2) – (3)
(5) Realized Gain/(Loss) $133,000 (1) – (4)
(6) Ordinary income from §1245 depreciation $50,000 Ordinary income
recapture (not eligible for installment reporting) Lesser of (3) and (5)
(7) Gain eligible for installment reporting $83,000 (5) – (6)
(8) Gross profit percentage 20.75% (7) / (1)
(9) Payment received in year 0 $40,000 Given in example
(10) Gain recognized on payment in year 0 $8,300 (9) x (8) §1231 gain
Total gain recognized in year 0 $58,300 (6) + (10)
(11) Payment received in years 1 through 6 (each
year) $60,000 Given in example
Gain recognized in years 1 through 6 (with each
payment) $12,450 (11) x (8) §1231 gain
60. [LO 6] {Research} Ken sold a rental property for $500,000; $100,000 in the current
year and $100,000 per year thereafter. $400,000 of the sales price was allocated to the
building and the remaining $100,000 was allocated to the land. Ken purchased the
property several years ago for $300,000. $225,000 of the purchase price was allocated
to the building and $75,000 was allocated to the land. Ken has claimed $25,000 of
10-53
depreciation deductions over the years against the building. If Ken had no other sales of
§1231 or capital assets in the current year, determine what Ken’s recognized gain or loss
is, the character of Ken’s gain, and calculate Ken’s tax due because of the sale (assuming
his marginal ordinary tax rate is 35 percent). (Hint: see the examples in Reg. §1.453-12.)
Ken has a §1231 gain of $25,000 taxed at a maximum 25% rate. He also has
a §1231 gain of $225,000 ($200,000 from the building and $25,000 from the
land) taxed at a maximum 15% rate. Ken’s tax liability is $42,500. The
unrecaptured §1250 gain is recognized before any of the §1231 gain (as
indicated by the regulations):

(4) Adjusted Basis 200,000 (2)+ (3)
(6) Unrecaptured §1250 gain $25,000 Lesser of (5) or (3)
(7) Remaining §1231 gain $175,000 (5) – (6)
Total §1231 gain $200,000 (6) + (7)

(4) Adjusted Basis 75,000 (2)+ (3)
Rat
Unrecaptured §1250 (§1231 35
gain) $25,000 % $8,750
$200,00 15
Other §1231 gain 0 % 30,000
$38,75
Tax 0

(2) Adjusted Basis $275,000 Given
10-54
(3) Gain Realized $225,000 (1) – (2)

(4) Gross Profit Percentage 45% (3) / (1)
(5) x (4), $25,000 of
unrecaptured §1250 and
Gain recognized in year 0 $45,000 $20,000 §1231 gain
(6) Payment received in year 1-4 $100,000 Given
Gain recognized in years 1-4 $45,000 (6) x (4), all §1231 gain
61. [LO 6] {Planning} Hillary is in the leasing business and faces a marginal tax rate of
35 percent. She has leased equipment to Whitewater Corporation for several years.
Hillary bought the equipment for $50,000 and claimed $20,000 of depreciation
deductions against the asset. The lease term is about to expire and Whitewater would
like to acquire the equipment. Hillary has been offered two options to choose from:
Option Details
Like-kind Whitewater would provide Hillary with like-kind equipment. The
exchange like-kind equipment has a fair market value of $35,000.
Installment sale Whitewater would provide Hillary with two payments of $19,000.
She would use the proceeds to purchase equipment that she could also
lease.
Ignoring time value of money, which option provides the greatest after-tax value for
Hillary, assuming she is indifferent between the proposals based on nontax factors?
Option 1, Description Amount Explanation

(1) Amount realized in like-kind $35,000 Given
(2) Amount realized in boot $0 Given
(3) Total amount realized $35,000
(4) Adjusted basis $30,000 $50,000 - $20,000
(5) Gain realized $5,000 (3) – (4)
(7) Deferred gain $5,000 (5) – (6)
10-55
Option 2 Description Amount Explanation

(2) Original Basis $50,000 Given
(3) Accumulated Depreciation $20,000 Given
(4) Adjusted Basis $30,000 (2) – (3)
(5) Realized Gain/(Loss) $8,000 (1) – (4)
(6) Ordinary income from §1245 depreciation $8,000 Ordinary income
recapture (not eligible for installment reporting)* Lesser of (3) and (5)
(7) Gain eligible for installment reporting $0 (5) – (6)
(8) Gross profit percentage 0% (7) / (1)
*Because all of the gain is subject to depreciation recapture, the installment method
cannot be used to defer the gain.
Character Amount
Cash from note $38,000
Rat
Gain e
$8,00 35
Tax 0 % ($2,800)
After Tax
Value $35,200
Hillary would be better off with Option 2. This is because her after tax value is $200
higher ($35,200 -$35,000). Additionally, her basis in option 2 is $5,200 ($35,200 -
$30,000) higher which will allow her higher depreciation deductions in the future.
62. [LO 6] Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre
purchased the stock several years ago for $3,000.
a. What gain or loss does Deirdre recognize on the sale?
b. What amount of gain or loss does James recognize if he sells the stock for
$3,200?
c. What amount of gain or loss does James recognize if he sells the stock for
$2,600?
d. What amount of gain or loss does James recognize if he sells the stock for
$2,000?
10-56
a. Though Deirdre realizes a $600 loss, she is not allowed to recognize any of
the loss because she sold the stock to a related party (her brother). See the
following computation:

(2) Basis $3,000 Given
(3) Gain (Loss) Realized ($600) (1) – (2)
(4) Disallowed Loss ($600) *no recognized loss on related party sale
Gain/(Loss) Recognized $0 (3) – (4)
b. $200 gain (see calculations below)

c. $0 (see calculations below)
d. ($400) loss (see calculations below)
Description Part Part Part Explanation

b c d
(1) Amount Realized $3,200 $2,600 $2,000
(2) Adjusted Basis $2,400 $2,400 $2,400 Given in problem
(3) Realized Gain (Loss) $800 $200 ($400) (1) – (2)
(4) Benefit of Deirdre’s Lesser of (3) (if a loss,
($600) disallowed Loss then $0) or $600 (the
amount of Deirdre’s
$600 $200 $0 disallowed loss)
Recognized Gain/(Loss) $200 $0 ($400) (3) – (4)
10-57

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Chapter 10 - Property: Dispositions

Anything received by the seller during a sale or exchange is included in the

6. [LO 2] What does it mean to characterize a gain or loss? Why is characterizing a

Once a gain or loss is recognized, a taxpayer must determine how the

Individual taxpayers prefer capital gains because they can be taxed at

The parcel of land could qualify as a capital asset if it is held by Dakota as an

could be ordinary income property to Dakota if it is held in a trade or business

11. [LO 3] Explain Congress’s rationale for depreciation recapture.

The purpose of depreciation recapture is to treat the gain on the sale of

§1245, sometimes referred to as full recapture, generally applies only to

excess of straight-line method is recaptured. §1250 recapture no longer

Both taxpayers used to be subject to §1250 recapture when selling real

Unrecaptured §1250 gain is similar to depreciation recapture in that the lesser of

Section 1239 requires gains on depreciable property sold to related taxpayers to

Jeraldine’s description is incorrect. The §1231 look-back rule simply

The look-back rule exists to prevent game playing (arbitrage) opportunities. It

A realized gain or loss is usually recognized in the year of disposition.

In a like-kind exchange, a taxpayer maintains an investment in an asset other

a. $85,000, computed as follows:

Property Received Amount Explanation

b. $105,000, computed as follows:

Property Received Amount Explanation

c. $72,000, computed as follows:

Property Received Amount Explanation

$14,400, computed as follows:

($15,000) loss, computed as follows:

a. Capital, because it is held for investment.

a. $18,000 ordinary income, computed as follows:

Description Amount Explanation

b. There is no difference in calculating the amount and character of the gain

c. $36,000 of income ($32,000 ordinary and $4,000 §1231) computed as follows:

Description Amount Explanation

d. ($4,000) ordinary loss, computed as follows:

Description Amount Explanation

a. $17,000 ordinary income.

Description Amount Explanation

b. $27,000 of income ($22,000 ordinary and $5,000 §1231) computed as follows:

Description Amount Explanation

c. ($3,000) ordinary loss, computed as follows:

Description Amount Explanation

a. ($2,000) ordinary loss.

Description Amount Explanation

b. $5,200 ordinary income.

Description Amount Explanation

a. Rayburn receives $840,000.

a. $18,000 ordinary income and $72,000 §1231 gain computed as follows:

Description Amount Explanation

b. $20,000 ordinary income and $130,000 §1231 gain computed as follows:

Description Amount Explanation

(2) Original Basis 850,000 Given

c. $(50,000) ordinary loss computed as follows:

Description Amount Explanation

a. Moran received $145,000.

b. §1231 gain of $52,000. Of the $52,000, $32,000 is unrecaptured §1250 gain

Description Amount Explanation

c. §1231 loss of ($8,000), calculated as follows:

Description Amount Explanation