Chapter 07 - Capital Gains and Other Sales of Property CHAPTER 7 CAPITAL GAINS AND OTHER SALES OF PROPERTY Discussion Questions 1. How are basis, adjusted basis, and fair market value defined as they apply to the calculation of gains and losses? Answer: a. Basis is defined as the cost of the property bought in cash, debt obligations, or other property of services. Property can also be acquired other than through a purchase as by gift, inheritance, divorces, or other exchange. b. Adjusted basis is the cost including any increases made to the property such as additions made to property or commission fees incurred on stocktransactions and decreases such as depreciation on property of stockdividends or splits. c. Fair market value is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Sales of similar property, around the same date are typically used in figuring fair market value. 2. What is meant by the t erms realized gain (loss) and recognized gain (loss) as they apply to the sale of assets by a taxpayer? Answer: The term realized is everything the taxpayer receives in the transaction and is sometimes called the proceeds from the sale. This includes cash received plus the FMV of any property or services also received in the transaction. The term recognized is the amount that will be recorded on the tax return as a gain or loss. Assets sold are considered realized but they may or may not be immediately recognized for tax purposes depending on the type oftransaction. 7-1
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7/16/2019 Chapter 7 Federal Taxation Textbook Solutions
Chapter 07 - Capital Gains and Other Sales of Property
3. How can the gain from the sale of property be characterized? Why is it important tocorrectly characterize the gain on the sale of property?
Answer:
The type of gain or loss is dependent on the character (use) of the asset.
Assets are classified as ordinary income property, §1221 capital property(capital assets), or §1231 trade or business property. It is important to
correctly characterize the gain on the sale of property because different types
of gains are reflected differently on the tax return. Depending on the nature
of the asset, the gains can be taxed at different rates, losses can be allowed
only to a certain extent, and gains and losses are reported in different places
on a tax return.
4. What is a capital asset ? What factors affect the determination of whether an asset isclassified as a capital asset?
Answer:
A capital asset includes assets that are not classified as other types of
property, which usually includes assets used for personal or investment
purposes. The most obvious example of a capital asset is stocks or bonds.
Examples of other capital assets include the taxpayer’s primary residence,
timber grown on home property, household furnishings, personal
automobile, coin and stamp collections, and jewelry. Capital assets do not
include stock in trade of the taxpayer (inventory), copyrights, accounts or
notes receivables, and property subject to depreciation.
5. What determines whether land is a capital asset? Discuss the circumstances under which land is considered a capital asset. How else can land be classified?
Answer:
Land held for investment is a capital asset. However, if the land is used in a
trade or business, it is not a capital asset but a §1231 asset. If the land was
held for resale by a real estate developer, the land is treated as inventory (an
ordinary asset).
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6. What is a §1231 asset? How are gains and losses from the sale of §1231 assetstreated? On what tax forms are gains and losses from the sale of §1231 assets reported?
Answer:
IRC §1231 property is property used in a trade or business that is subject to
depreciation and held for more than 1 year, which includes real propertyheld for more than 1 year and used in the trade or business even though
depreciation is not allowed (e.g., land). Timber, coal, domestic iron ore and
certain livestock held for breeding, dairy, or sporting purposes are also
considered §1231 property. The most typical examples of §1231 assets are
machinery and equipment, buildings, and land used in a business. When a
§1231 asset is sold, the gain may be either ordinary or capital. The sale of
§1231 assets (both gains and losses) is initially reported on Form 4797.
7. When making the determination of whether an asset is a §1231 asset, does the length
of time the asset is held enter into the classification? Explain.
Answer:
By definition, IRC §1231 property is property used in a trade or business
and is subject to depreciation and held for more than 1 year.
8. What are the different classifications of capital assets? Define each classification andexplain the difference in the preferential tax treatment (rate at which the gains are taxed).
Answer:
Collectibles 28% rate
IRC §1202 Gain 28% rate
Unrecaptured §1250 Gain 25% rate
Other Capital Gains (pre 5/06/03 sales) 10% or 20% rate*
Other Capital Gains (post 05/05/03 sales) 5% or 15% rate *
* The actual rate is dependent on the tax bracket of the taxpayer. Most
capital gains will be taxed at 20% for pre 05/06/03 sales and 15% for post
05/05/03 sales
9. Discuss the concept of ordinary income property and give some examples.
Answer:
Ordinary income property can be defined as any asset that is not a capital
asset. The two most common ordinary assets are inventory and accounts
receivable.
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14. Capital gains can be taxed at several different rates. What determines the rate?
Answer:
Net long-term capital gains can be taxed at a 5%, 10%, 15%, 20%, 25%, or
28% rate. Except for unrecaptured §1250 gains and “collectible gains” (see
below), long-term capital gains are taxed at either 5%/15% (post 05/05/03) or10%/ 20% (pre 05/06/03). The determination of the percentage is based on
the taxpayer’s taxable income and corresponding tax bracket. The 25% rate
relates to capital gains from depreciable real property (buildings) used in a
trade or business. The 28% capital gain rate applies to “collectible gains”
and §1202 gains.
15. What is a §1202 gain and how is it taxed?
Answer:
IRC §1202 provides a provision to limit the taxation on a gain from the saleof a “qualified small business stock.” In the case of a taxpayer other than a
corporation, gross income shall not include 50% of any gain from the sale or
exchange of qualified small business stock held for more than 5 years. The
28% tax rate applies to §1202 gain
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16. Discuss the netting process of capital gains and losses. What are the possibleoutcomes of the netting process and how would each situation be taxed?
Answer:
In order to determine net capital gains and losses, the taxpayer must
combine short-term capital losses and short-term capital gains to obtain a netshort-term gain or loss. The long-term capital gains and losses must also be
combined resulting in a net long-term capital gain or loss. The net short-
term gain or loss is then netted with the long-term gain or loss. Then the
taxpayer must separate the gains that are taxed at 28% (collectibles and
§1202 gains). If an overall net loss results, the taxpayer is allowed to deduct
up to a maximum of $3,000 against other income. Any net loss exceeding the
$3,000 is carried over indefinitely to offset other capital gains. The netting
process can result in several different outcomes.
• If the result is a net short-term gain and a net long-term gain the tax is
paid at the regular tax rates for short-term gain and the net long-term
gain is taxed as the appropriate capital gain rate.• If the result is a net short-term gain and a net long-term loss, the long-
term loss is offset against the short-term gain.
• If a short-term gain exceeds the long-term loss, the short-term gain is
taxed at the regular tax rates.
• If a long-term loss results, the loss is allowed up to $3,000 against other
income and any excess is carried forward indefinitely.
• If the result is a net short-term loss and a net long-term gain, the long-
term gains need to be separated into the 28%, 25%, and 20%/10% or
5%/15% groups. The net short-term loss is first offset against the 28%
group, then the 25% group and if any loss remains, the 20% (15% post
05/05/03) group gains are reduced.• If the result is a net short-term loss and a net long-term loss, only $3,000
of the losses can be deducted against other income. The short-term losses
are deducted against other income and if any of the $3,000 limit remains,
the long-term loss is allowed (up to the $3,000 limit).
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17. What is a §1245 asset? How is it related to a §1231 asset?
Answer:
A §1245 asset property is personal trade or business property subject to
depreciation. It does not include land, buildings, and building structural
components. A gain on the sale of §1245 asset is ordinary to the extent of depreciation taken. Any gain in excess of depreciation taken is considered
to be a §1231 gain and would receive long-term capital gain treatment.
This type of gain is unusual because equipment rarely appreciates and any
gain is usually caused by accelerated depreciation.
18. Discuss the concept of §1245 recapture. Why is the gain on the sale of a §1245 assettreated as ordinary? Is all the gain on the sale of a §1245 asset always treated asordinary?
Answer:The §1245 recapture provisions only apply when a gain occurs on the sale of
§1231 property. Any gain on the sale of §1245 property is ordinary to the
extent of depreciation taken. Any excess gain is taxed at long-term capital
gain rates.
19. What is a §1250 asset? How is it related to a §1231 asset?
Answer:
A §1250 asset is depreciable real property in a trade of business that has
never been considered §1245 asset property. It includes all buildings,
residential and non-residential, used in a business or for the production of
income. Since an ordinary expense deduction was allowed for depreciation
on the asset, some or all of the gain from the sale should be treated as
ordinary. Any gain in excess of this gain is considered a §1231 gain and is
taxed at the preferential rate. If there is a loss, the loss is always treated as an
ordinary loss.
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22. How can a taxpayer determine the basis of units from a mutual fund?
Answer:
The gain or loss from the sale of mutual fund stock is calculated by
subtracting the total cost basis from the sale proceeds. If the units were
purchased at different times for different prices, there are several rules thatmust be followed. The first-in first-out method requires that the first shares
purchased be deemed the first sold. Using the specific identification method
the taxpayer specifically specifies which units are to be sold. Using the
average basis method, the taxpayer takes the total cost basis and divides by
the total units to get an average cost per unit (single category method). The
taxpayer can also use a “double-category method,” where an average is
calculated for the short-term basis and short-term units and the average is
calculated for a long-term basis and long-term units.
23. How are gains (losses) from the sale of property acquired from an inheritance taxed?
Answer:
The beneficiary can choose one of two valuation dates to determine FMV.
They are the date of death or six months after death which is termed the
“alternate valuation” date. The holding period is always considered long
term.
Multiple Choice
24. Jim sells a parcel of land for $60,000 cash and the buyer assumes Jim’s liability of $8,000 on the land. The basis of Jim’s land is $50,000. What is the gain or loss on thesale?a. $2,000 gain b. $10,000 gainc. $18,000 gaind. $18,000 loss
Answer: c
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25. All of the following statements regarding the definition of basis other than cost aretrue except:a. Basis for assets received as a gift depends on whether the FMV is greater than, equalto, or less than the donor’s basis at the time of the gift. b. The basis of property transferred to a taxpayer from a former spouse pursuant to a
divorce decree is valued at the FMV at the date of the decree.c. Basis of inherited property is FMV at the date of death or alternate valuation date thatthe personal representative is allowed by law to choose.d. Basis for property received in exchange for services rendered is the FMV of the property if the FMV of the services is not known beforehand.
Answer: b
26. All of the following expenses increase the basis of stock held for investment except:a. Commission fees on the purchase of stock.
b. Stock splits.c. Stock dividends from a dividend reinvestment plan.d. All of the above increase the basis of stock held for investment.
Answer: b
27. In 2000, Matthew purchased land for $97,000 for use in his business. He sold it in2007 for $103,000. What are the amount and type of gain on this sale before netting of any other gains and/or losses?a. $6,000 short-term capital gain b. $6,000 long-term capital gainc. $6,000 ordinary incomed. $6,000 §1231 gain
Answer: d
28. On May 20, 2006, Jessica purchased land for $92,000 to use in her business. She soldit on May 21, 2007 for $87,000. What are the amount and type of loss on this sale if Jessica does not have any other sales from a trade or business?a. $5,000 deferred loss b. $5,000 long-term capital lossc. $5,000 ordinary lossd. $5,000 § 1231 loss
Answer: c
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29. What are the “maximum gain rates?a. 33% and 35% b. 15% and 25%c. 25% and 28%d. 5% and 15%
Answer: d
30. In 1998, Sam purchased 2,000 shares of stock for $50,000 in a mid-size localcompany with gross assets of $15,000,000. In 2007, Sam sold the stock for $88,000.How is the gain treated for tax purposes?a. $38,000 capital gain and taxed at preferential rates. b. $19,000 excluded from gross income under §1202 with the remaining gain recognizedand taxed at regular rates.c. $19,000 excluded from gross income under §1202 and $19,000 taxed at 28%
d. $19,000 excluded from gross income under §1202 and $19,000 taxed at preferentialrates.
Answer: c
31. Blair sold the following stocks in 2007: 200 shares of Deaborn Investments purchased May 15, 2006 for $3,050 and sold January 9, 2007 for $4,135 and 40 shares of State Street Investments, purchased November 7, 2004 for $11,875 and sold March 29,2007 for $8,675. What is the pre-net amount and nature of the gain (loss) on the sale of these transactions on Blair’s 1040 return for 2007?a. $1,085 short-term gain and $2,000 long-term loss. b. $1,085 short-term gain and $3,200 long-term loss.c. $1,915 net long-term loss.d. $2,115 net long-term loss.
Answer: b
32. Which statement is true regarding short-term capital gains?a. If there is a net short-term gain and a net long-term gain both gains are taxed at regular rates. b. A long-term loss offsets a short-term gain and if a gain results, the gain is taxed atregular rates.c. A long-term loss offsets a short-term gain and if a gain results, the gain is taxed at preferential rates.d. If there is a net short-term gain and a net long-term gain both gains are taxed at preferential rates.
Answer: b
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33. Which is true regarding long-term capital gains?a. A net long-term gain can offset a short-term gain but not a short-term loss. b. A net long-term gain can be taxed at 28%, 25%, 15% or 5% depending on the type of gain generated.
c. A net long-term loss can be offset against a long-term gain and if there is a resultinglong-term gain, it is taxed at regular rate.d. A long-term loss can only offset a long-term gain if the “netting” result produces a lossof more than $3,000.
Answer: b
34. When there is a net short-term loss and a net long-term loss, which of the followingis true?a. The entire short-term loss is used to deduct other income before the long-term loss can
be used to offset other income. b. A long-term loss is used to deduct other income before the short-term loss.c. Regardless of the amount of a short-term or long-term loss, the maximum amount of loss that can be taken in any one year is $3,000. Any remaining loss amounts can becarried forward for 3 years.d. Regardless of the amount of a short-term or long-term loss, the maximum amount of loss that can be taken in any one year is $3,000. Any remaining loss amounts can becarried forward indefinitely. Answer: d
35. Alton received a Form 1099-B that shows a net sales price of $1,500 on the sale of 600 shares of FNP Company. He bought the stock on October 21, 2006, and sold it onOctober 22, 2007. His basis in the stock is $1,325, of which $25 is commission fee.What is the amount and nature of Alton’s gain?a. $175 short-term gain. b. $200 short-term gain.c. $175 long-term gain.d.$200 long-term gain.
Answer: c
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36. Amal received a Form 1099-DIV with a capital gain distribution of $170. She alsoreceived a Form 1099-B from the sale of 240 shares of AMS stock she purchased for $2,400 plus $28 commission fee on February 22, 2006. The net proceeds of the stock sale were $2,200 (commission fee was $14) and the trade date was February 22, 2007.What is the amount and nature of Amal’s gain (loss) on these transactions?
a. $214 short-term loss and $170 long-term gain. b. $214 long-term loss and $170 short-term gain.c. $228 long-term loss and $170 short-term gain.d. $228 short-term loss and $170 long-term gain.
Answer: d
37. Shannon bought an apartment building in July 2001 for $360,000 and sells it for $480,000 in 2007. There was $95,000 of accumulated straight-line depreciation on theapartment building. Assuming that Shannon is in the 33% tax bracket, how much of her
gain is taxed at 25%?a. $0 b. $95,000c. $120,000d. $215,000
Answer: b
38. Karen, a single taxpayer, has income from her W-2 of $60,000. She also has a short-term capital loss of $8,000, a short-term capital gain of $3,000, and a long-term capitalgain of $4,000. What is Karen’s AGI for 2007?a. $59,000 b. $61,000c. $64,000d. $67,000
Answer: a
39. In 2007, Ann received 1,000 shares of stock as a gift from her husband Tim, who purchased them in 2000. At the time of the gift, the FMV of the stock was $20,000 andTim’s basis was $25,000. If Ann sells the stock for $28,000, what are the nature andamount of the gain from the sale?a. $3,000 long-term gain. b. $8,000 long-term gain.c. $3,000 short-term gain and $5,000 long-term gain.d. $3,000 long-term gain and $5,000 short-term gain.
Answer: a
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40. In 2007, Ann received 1,000 shares of stock as a gift from her husband Tim, who purchased them in 2000. At the time of the gift, the FMV of the stock was $20,000 andTim’s basis was $25,000. If Ann sells the stock for $18,000, what are the nature and
amount of the loss from the sale?a. $2,000 long-term loss. b. $5,000 long-term loss.c. $7,000 long-term loss.d. $2,000 short-term loss and $5,000 long-term loss.
Answer: a
Problems
41. On what tax form is gain or loss reported if land is undeveloped? On what tax formis gain or loss reported if land is used in a trade or business?
Answer:
Undeveloped – report on Schedule D
Trade or Business – report on Form 4797, pg. 1 Part I
42. Stanley buys a painting for $500 from a museum for resale in his art gallery. He soldit 18 months later for $1,400. What is the most favorable tax treatment for Stanley?
Would the tax treatment be different if Stanley had purchased the painting for personalenjoyment?
Answer:
Since the painting was purchased for resale, the painting is considered
inventory. Thus the $900 gain would be treated as ordinary income. If the
painting was held as a personal investment, the gain would be considered a
long-term capital gain and taxed at a maximum rate of 28% for a collectible.
43. Alice owns undeveloped land as an investment with an adjusted basis of $140,000.
She sells the property to George for $185,000.
a. What is Alice’s realized and recognized gain or loss?
$185,000 - $140,000 = $45,000 realized and recognized gain
b. What is the character of the gain or loss?
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Section 1221 capital gain
c. If the land is used in a trade or business, is the character of the gain or loss different?Explain.
Yes, the gain would be a §1231 gain. However, the gain would still be treated
as capital but must first offset §1231 losses.
44. Gaylord has taxable income of $95,000 without consideration of capital gain or losstransactions. He has a short-term capital gain of $10,000, a long-term capital loss of $2,000, and a short-term capital gain of $4,000. What is the effect of these gains andlosses on taxable income? What are the amount and nature of any carryforward?Assuming that none of the gains or losses is from collectibles or unrecaptured §1250 property, at what tax rate will the gains or losses be taxed to Gaylord who is in the 25%
tax bracket for ordinary income?
Answer:
Short-term Capital Gain $10,000
Short-term Capital Gain $ 4,000
Net Short-term Capital Gain $14,000
Long-term Capital Loss $ 2,000
Netted gives the taxpayer a $12,000 net short-term capital gain.
The net short-term gain is included in taxable income with no carryovers. A
short-term capital gain gets no preferential treatment. The $12,000 would be
reported on Schedule D but would be taxed at the ordinary income rate.
45. Jake purchased a $200,000 crane for his construction business. He sold the crane for $145,000 after taking $110,000 of depreciation. What are the nature and the amount of gain or loss on the sale? On what tax form would the gain or loss originally be reported?
Answer:
Sale Proceeds $145,000
Adjusted Basis $ 90,000
§1245 Gain $ 55,000
======
Since the property is §1245 property, the gain is ordinary to the extent of
depreciation taken. Thus, the gain would be ordinary and reported on page
2 of Form 4797.
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46. Rufus owns two plots of land for business use. He has a short-term-capital loss of $18,000 from other sources. He has the opportunity to sell one parcel (Plot A) at a gainof $52,000, and the other (Plot B) for a loss of $21,000. What would be the tax effects toRufus if he sells:
a. Plot A only?
S/T Capital Loss ($18,000)
§1231 (LTCG) $52,000
Plot A §1231 LTCG $34,000
Taxed at a maximum rate of 5% or 15%
b. Plot B only?
S/T Capital Loss ($18,000)
Plot B §1231 ordinary loss ($21,000)
The ordinary loss on Plot B is deductible as an ordinary loss and the S/T
capital loss of $15,000 is carried forward indefinitely and $3,000 could be
used against ordinary income.
c. Both Plots A and B?
S/T Capital Loss carryover ($18,000)
§1231 (LTCG) $52,000
§1231 Loss Plot B ($21,000)
Net §1231 Gain (LTCG) $31,000
The net §1231 gain of $31,000 is netted with the $18,000 loss and results in a
$13,000 LTCG. The LTCG is taxed at a maximum rate of 5% or 15%.
d. What would you recommend? Explain your recommendation.
From a tax perspective, the best option would be to sell both properties. The
$18,000 loss is used to lessen the gain on Plot A and the loss on Plot B would
nearly eliminate the excess gain.
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b. How would the gains and losses be netted?
The long-term gain from the sale of ABC (Section 1202 stock) and loss are
netted first and then netted with the short-term loss. The result is a net long-
term capital gain of $18,000 which is taxed at the 28% per the special rules
for the sale of Section 1202 stock.
c. On what form would the gains and losses be reported? Complete page 1 of that formto show the proper reporting of these stock sales.
---------- Insert filled in Schedule D here, one page -------------
49. Ricardo acquired a warehouse for business purposes on August 30, 1990. The
building cost $200,000. He took $133,333 of depreciation on the building, and then soldit for $350,000 on July 1, 2007. What are the amount and nature of Ricardo’s gain or loss on the sale of the warehouse?
Sales Price $350,000
Adjusted Basis $200,000
Less Depreciation -$133,333 ($ 66,667)
$283,333 gain
$133,333 of the gain would be unrecaptured Section 1250 gain which
becomes a long-term capital gain taxed at 25%. The remaining $150,000 is a
Section 1231 gain.
50. Davidson Industries, a sole proprietorship, sold the following assets in 2007.
Chapter 07 - Capital Gains and Other Sales of Property
a. Determine the amount and the character of the realized and recognized gain or lossfrom the sale of each asset.
Warehouse Truck Computer
$175,000 $16,000 $21,000
$122,000 $13,500 $22,000$53,000 $2,500 ($1,000)
The warehouse is a §1231 gain – treated as a long-term capital gain ($28,000
of the gain would be a unrecaptured 1250 gain subject to 25% tax rate, the
remaining gain is netted with other §1231 gains).
The truck is a §1245 gain subject to recapture to the extent of depreciation
taken – the $2,500 gain is treated as an ordinary gain.
The computer is a §1231 loss and therefore is treated as ordinary loss.
b. Prepare Form 4797 to report the gains and losses.
------------- Insert filled in Form 4797 here, 2 pages ----------------
c. How would your answer change if the computer were a personal computer used athome?
The computer would be a personal asset and the corresponding loss would
not be deductible.
51. Juan sells depreciable equipment for $65,000, the property’s FMV. His adjusted basis for the equipment was $40,000, and he had originally purchased the equipment for $70,000. What are the tax consequences of this sale to Juan?
Sales Price $65,000
Basis $40,000
Gain $25,000
The gain would be a §1245 propety gain and thus be subject to recapture.The $25,000 gain would be treated as ordinary.
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52. Rowena acquired depreciable real property for $175,000 on January 1, 2001. Shesold the asset on January 5, 2007 for $120,000, when its adjusted basis was $95,000.
a. Calculate the amount and nature of the gain if the real property were nonresidential.
Sales Price $120,000Basis $ 95,000
Gain $ 25,000
The $25,000 gain would be classified as a Section 1250 property gain subject
to the unrecaptured depreciaton provision which is taxed at a 25% rate.
b. Would the nature of the gain change if the real property were residential? Explain.
The gain would change because the deprecation life would change from 39
year S/L to 27 ½ years for residential real property. The character of the gainwould remain the same.
53. In 2007, Juanita sold stock considered short-term for a gain of $875 and stock considered long-term for a loss of $2,400. She also had a $2,000 short-term losscarryover from 2006 and a $240 long-term loss carryover from 2006.
a. What amount will be shown as a short-term gain (loss) for 2007?
$2,000 short-term loss carryover - $875 gain for 2007 = $1,125 short-term
loss for 2007.
b. What amount will be shown as a long-term gain (loss) for 2007?
$240 long-term loss carryover + $2,400 loss for 2007 = $2,640 long-term loss
for 2007.
c. Will there be a carryover for 2008? If so, what is the nature and amount of thecarryforward.
Yes, the maximum amount of loss to be deducted in any one year is $3,000.
Therefore the $1,125 short-term loss will be allowed in 2007 as will $1,875 of
the long-term loss of $2,640. The remaining long-term loss of $765 will be a
carryover long-term loss to 2008.
d. Prepare a Schedule D. (Detailed stock information has been omitted; use reasonableassumptions to complete the form)
------------- Insert filled in Schedule D here, 2 pages ----------------
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54. Howard, operator of a sole proprietorship, sold the following assets in 2007.
a. Determine the amount and the character of the realized and recognized gain or lossfrom the sale of each asset.
Forklift
Sales Price $55,000
Cost $75,000
Accumulated Depreciation (35,645) 39,355
§1245 gain, all treated as ordinary income $15,645
Truck
Sales Price $24,000
Cost $31,000
Accumulated Depreciation (19,096) 11,904
§1245 gain, all treated as ordinary income $12,096
Bulldozer
Sales Price $30,000
Cost $48,000
Accumulated Depreciation (12,737) 35,263
§1231 loss, treated as ordinary loss ($5,263)
b. Prepare a Form 4797.
------------- Insert filled in Form 4797 here, 2 pages ----------------
55. Jernigan Company, a sole proprietorship, acquired a building for use in the businesson April 15, 2005, for $450,000. Straight-line cost recovery was used. Jernigan sold the building for $390,000 on December 31, 2007.
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Asset Cost Acquired Depreciation Sales
Price
Sale
DateForklift $75,00
02/15/05 $35,645 $55,00
06/30/07
Truck $31,000
12/15/05 $19,096 $24,000
5/01/07
Bulldozer $48,000
7/31/06 $12,737 $30,000
12/31/07
7/16/2019 Chapter 7 Federal Taxation Textbook Solutions
Chapter 07 - Capital Gains and Other Sales of Property
Average Cost Method
Average Cost: $11,879.00/1,326 shares = $8.959
Total basis: 830 shares x $8,959 $7,435.573
Less Proceeds: $7,366.250
Loss: ($ 69.323) = $69.32
Tax Return Problems
Use your tax software to complete the following problems. If you are manually preparing the tax returns, you will need Form 4797, Schedule D, Schedule A, ScheduleB, Form 1040, and Schedule D worksheets.
Tax Return Problem #1
Jeffery Norville is a single taxpayer. His SSN is 123-44-7788 and he lives at 5037 CircleCourt, Crestview, Illinois. His W-2 for 2007 shows gross wages of $83,000 with $5,146of Social Security and $1,203.50 of Medicare taxes withheld. He has $17,747 of federalwithholding and $2,490 in state withholding. Jeffrey does not itemize. He had thefollowing stock transactions for the year:
Stock Date Date Sales CostShares Purchased Sold Price Basis5,500 7/8/06 9/12/07 15,000 18,000
He also has interest from a savings account with Local Neighborhood Bank of $167.84and a dividend from a 1099-DIV in the amount of $1,389 with $1,106 in qualifieddividends.
Prepare a Form 1040 for Jeffery and all related schedules and forms.
---------------- Insert filled in tax forms here -------------------------Form 1040 – 2 pagesSchedule B – one pageSchedule D – two pages------------------------------------------------------------------------------
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7/16/2019 Chapter 7 Federal Taxation Textbook Solutions
Their Schedule A deductions consist of $8,642 in real estate taxes, $15,000 in mortgageinterest, and $5,000 in charitable contributions. They have $2,385 in interest fromTreasury Bills. During the year they sold the following assets:
Equipment on May 15, 2007 for $123,000 that cost $120,000 on May 20, 2005; with$5,000 depreciation had been taken on the equipment; which was used in Tony’s trade or business.
Land, held as an investment, was sold on December 19, 2007 for $110,000. It cost$118,500 when it was purchased on February 22, 2000.
Prepare a Form 1040 for Tony and Agnes Miller and all related schedules and forms.
---------------- Insert filled in tax forms here -------------------------Form 1040 – 2 pagesSchedule A – one pageSchedule B – one pageSchedule D – two pagesForm 4797 – two pages------------------------------------------------------------------------------
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7/16/2019 Chapter 7 Federal Taxation Textbook Solutions
Chapter 07 - Capital Gains and Other Sales of Property
Tax Return Problem # 3
Janis Blakeley is a single taxpayer who lives at 5411 Melbourne Avenue, Chicago, IL;her SSN is 123-45-9876. She sold the following assets in 2007:
Section 1245 (equipment) property was purchased on November 21, 2002 for $86,000and was sold for $71,250 on October 11, 2007; $24,000 of depreciation had been taken.
A two-flat apartment building purchased for $284,600 on June 13, 1999 for $248,900 onFebruary 13, 2007; $53,815 of depreciation had been taken.
She also had some investments in a mutual fund and received a substitute 1099 at the endof the year. She received $2,634 in dividends of which $891 was considered qualifieddividends. She also had a capital gain distribution of $4,711 from the fund.
Janis worked two jobs and had the following W-2’s:
Federal withholding = $ 2,000State withholding = $ 600
Janis’ Schedule A deductions consisted of $7,633 real estate taxes, $10,000 mortgageinterest, and $3,000 charitable contributions. Prepare a Form 1040 for Janis Blakeley and all related schedules and forms.
---------------- Insert filled in tax forms here -------------------------Form 1040 – 2 pagesSchedule A – one page
Schedule B – one pageSchedule D – two pagesForm 4797 – two pages------------------------------------------------------------------------------