Question

Sara had the following Section 1231 gains and losses for the preceding 5 years

Year	Gains	Losses
2104	15,000	7,000
2015	3,000	35,000
2016	10,000	0
2017	4,000	2,000
2018	35,000	8,000

For 2018 Sarah should report the income and the character of that income on her 2018 tax return

A. Ordinary gain in the amount of $27,000.

B. Capital gain in the amount of $27,000.

C. Ordinary loss and capital gain in the amounts of $8,000 and $35,000, respectively.

D. Ordinary gain and capital gain in the amount of $20,000 and $7,000.

E. Ordinary gain and capital gain in the amounts of $8,000 and $19,000, respectively

Greg and Lisa are married taxpayers.  They are filing their tax return and ask you for help.  They have already calculated their AGI at $100,000 the following expenditures:

Medical expenses                                                      $5,000

Estimated state tax payments                                    7,500

Property taxes                                                             4,000

Sales paid                                                                     2,000

Charitable Donations                                                 2,500

Mortgage Interest (indebtedness $500,000)             8,900             

You advise them they should

A. They can claim total of $29,900 on Schedule A.

B. They can claim total of $26,400 on Schedule A.

C. They can claim total of $21,400 on Schedule A

D. They can claim total of $21,900 on Schedule A

E. They should take the standard deduction, which is higher than the itemized deduction amount.

In 2019, Jim exchanges real property in a like kind exchange.  Jim receives real property with a fair market value of $78,000 and transfers a property with a fair market value of $70,000 and $8,000 in cash. Jim’s adjusted basis in the property is $45,000.  

18.  What is Jim’s realized and recognized gain?

A. $33,000 Realized and $33,000 Recognized.  

B. $33,000 Realized and $0 Recognized.

C. $33,000 Realized and $25,000 Recognized

D. $33,000 Realized and $8,000 Recognized

E. $0 Realized and $25,000 Recognized

19. What is Jim’s basis in the land that he receives?

A. $8,000

B. $70,000.

C. $78,000

D. $45,000

E. $62,000

Answer 1

Question 1:-

Based on the information available in the question, the correct answer is Option D - Ordinary gain and capital gain in the amount of $20,000 and $7,000 respectively. A section 1231 loss is allowed to be recaptured upto 5 years following the year of the loss. When such losses are recaptured, the extent to which losses are recaptured would be considered as ordinary income during the year of recapture while any excess gain during the year would be recognized as capital gain. Based on the observation of the question, Sara had a Section 1231 loss of $35,000 during 2015 and a gain of $3,000 in the same year. The excess loss of $32,000 ($35,000 - $3,000) can be carried forward for a period of upto 5 years to set off against the section 1231 gain. Hence, Sara's 2015 Section 1231 losses are carried forward as follows:-

Year	Gain	Losses	Available for recapture	Recaptured amount	Balance of Section 1231 loss of 2015
2015	3,000	35,000	3,000	3,000	32,000
2016	10,000	-	10,000	10,000	22,000
2017	4,000	2,000	2,000	2,000	20,000
2018	35,000	8,000	27,000	20,000	-

During 2018, even though the balance available for recapture is $27,000, the remaining amount of unrecaptured section 1231 losses of the prior years is limited to $20,000 . As such, $20,000 is recaptured as Ordinary income while the remaining $7,000 is treated as Capital gains.

Option A is incorrect. This option is incorrect because as per the calculation above, the ordinary gain is limited to $20,000.

Option B is incorrect. The capital gain is $7,000 because in 2018, the ordinary gain is recaptured upto $20,000 per the calculation above.

Option C is incorrect. The $8,000 reflect the losses and hence cannot be treated as a gain. Also, the $35,000 capital gain is incorrect as the actual capital gain is $7,000 per the considerations above.

Option E is incorrect. The ordinary and capital gain amounts per this option is incorrect per the calculation above. Hence, this option is incorrect.