Question

T/F

19. Gains/losses resulting from the disposition of depreciable or real property used in a trade or business and held for one year or less are considered capital in nature.

20. The tax rules are different for condemnations and casualties, even though both are involuntary conversions of property.

21. The purpose of Sec. 1245 is to eliminate any advantage taxpayers would have if they were able to reduce ordinary income by deducting depreciation and subsequently receive Sec. 1231 treatment when the asset was sold.

Answer 1

19. Any gain or loss arising from the non depreciable assets which are held for less than 1 year are of revenue in nature at the time of sell. The capital nature arises when the non depreciable assets are held for more than an year.

But for depreciable assets any gain or loss is treated as capital gain or loss

Gains and loss resulting from the disposition of depreciable or real property used in a trade or business and held for one year or less are considered as capital in nature.

The Answer is True.

20.Involuntary conversion is the destruction or loss of property without the consent of owner, such as partial or complete destruction, theft, condemnation. It is not done voluntorily and not in the control of the property owner.It generally happens unexpectedly Normally to reduce the risk of it Insurances are taken.

Normally the Involuntary conversion does not differentiate while giving tax treatment for condemnation and casualities capital gains are subject to tax in both the cases.

The Answer is False

21.

Section 1231 applies on properties used for business and held for more than 1 year , it treats the gains as long term capital gains are charged at lower rates of taxes. Whereas section 1245 takes the gain of non real property like machinery equipments this section is used to recapture depreciation at ordinary incomes on properties sold at a gain.

Normally the business claims depreciation expenses and reduce it from ordinary income , so if the depreciated assets is sold more than its carrying value i.e at gain then to the extent of depreciation which is reduced from income will be treated as ordinary income. It reduces the portion of capital gain and provide the depreciation part of assets to ordinary income.  

Hence ,the purpose of Sec. 1245 is to eliminate any advantage taxpayers would have if they were able to reduce ordinary income by deducting depreciation and subsequently receive Sec. 1231 treatment when the asset was sold.

The Answer is True.