Question

34) During the current year, LaVone recognizes a $30,000 Sec. 1231 gain on sale of land and a $18,000 Sec. 1231 loss on the sale of land. Prior to this, LaVone's only Sec. 1231 item was a $14,000 loss six years ago. LaVone must report a

A) $12,000 net LTCG.

B) $12,000 ordinary income.

C) $14,000 ordinary income.

D) $10,000 ordinary income and $2,000 net LTCG.

35) Sec. 1231 property will generally have all the following characteristics except

A) real or depreciable property.

B) used in trade or business.

C) held for sale to customers.

D) held for more than one year.

36) During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are

A) LTCG of $30,000.

B) Sec. 1231 gain of $30,000.

C) Sec. 1245 ordinary income $30,000.

D) Sec. 1250 ordinary income of $30,000.

Answer 1

Ans 34. B) $12,000 ordinary income.

Under Section 1231(c), 1231 gains are treated as ordinary income to the extent of net 1231 losses over the past five years. This means that 1231 losses may only provide a temporary advantage: if there are 1231 gains within the next five years, they will be treated as ordinary income to the extent that they offset the prior loss.

Ans 35.  C) held for sale to customers.

These  transactions are considered under 1231 IRS regulations:

Sale or exchange of real property, personal property that is depreciable – If the property was held for more than a year and was used in trade or in a business

Ans:36. A) LTCG of $30,000.

If the sale of section 1245 property is less than the depreciation or amortization on the property, or if the gains on the disposition of the property are less than the original cost, gains are recorded as normal income and are taxed as such. If the gain on the disposition of the section 1245 property is greater than that original cost, then those gains are taxed as capital gains.