Chapter 10 Property Dispositions

1. [LO 1] Rafael sold an asset to Jamal. What is Rafael’s amount realized on the sale in each of the following alternative scenarios?

1. Rafael received $80,000 of cash and a vehicle worth $10,000. Rafael also pays $5,000 in selling expenses.
2. 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.
3. 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.

2. [LO 1] Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market of the hotel in February is $725,000. (Assume that the alternative valuation date is not used.)

a. What is Alan’s adjusted basis in the hotel?

b. If the fair market value of the hotel at the time of Mary’s death was $500,000, what is Alan’s basis?

3. [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?

4. [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?

5. [LO 1, 2] Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What is the amount and character of Hannah’s recognized gain or loss on the stock?

6. [LO 1, 2] On September 30 of last year, Rex received some investment land from Holly as a gift. Holly’s adjusted basis was $50,000 and the land was valued at $40,000 at the time of the gift. Holly acquired the land five years ago. What is the amount and character of Rex’s recognized gain (loss) if he sells the land on May 12 this year at the following prices?

a. $32,000

b. $70,000

c. $45,000

7. [LO 1, 2] Franco converted a building from personal to business use in May 2012 when the fair market value was $55,000. He purchased the building in July 2009 for $80,000. On December 15 of this year, Franco sells the building for $40,000. On the date of the sale, the accumulated depreciation on the building was $5,565. What is Franco’s recognized gain or loss on the sale?

8. 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.

9. [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?

10. [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 (loss) Longworth will recognize on the sale?

b. What is the amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were increased to $45,000?

c. What is the amount and character of the gain (loss) Longworth will recognize on the sale if the sale proceeds were decreased to $15,000?

11. [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 or loss Dirksen will recognize on the sale?

b. What is the amount and character of the gain or loss Dirksen will recognize on the sale if the machine was sold on January 15 of year 1 instead?

12. [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.

13. [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.

14. [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 tangible personal property sold for $550,000? What effect does the sale have on Hart’s tax liability for the year

c. What is the amount and character of Hart’s recognized gain if the asset is tangible personal property sold for $350,000? What effect does the sale have 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?

15. [LO 4] Luke sold a building and the land on which the building sits to his wholly owned corporation, Studemont Corp. 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 at the time of the sale; Luke purchased the land many years ago for $130,000.

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?

16. [LO 5] Buckley, an individual, began a business two years ago and has never sold a §1231 asset. Buckley owned each of the assets since he began the business. In the current year, Buckley sold the following business assets:

Asset	Original Cost	Accumulated 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 is the character of 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 is the character of 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 is the character of Buckley’s gains or losses for the current year? What effect do the gains and losses have on Buckley’s tax liability?

48. (LO3, LO4, LO5) Lily Tucker (single) owns and operates a bike shop as a sole proprietorship. This year, she sells the following long-term assets used in her business:

Asset	Sales Price	Cost	Accumulated Depreciation
Building	$ 230,000	$200,000	$52,000
Equipment	80,000	148,000	23,000

Lily’s taxable income before these transactions is $160,500. What is Lily’s taxable income and tax liability for the year?

49. (LO3, LO4, LO5) Shimmer Inc. is a calendar-year end, accrual-method corporation. This year, it sells the following long-term assets:

Asset	Sales Price	Cost	Accumulated Depreciation
Building	$ 650,000	$642,000	$37,000
Sparkle Corporation stock	130,000	175,000	n/a

Shimmer does not sell any other assets during the year and its taxable income before these transactions is $800,000. What is Shimmer’s taxable income and tax liability for the year?

50. [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 greater tax savings for Aruna.