CHAPTER 8

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University of Utah *

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Accounting

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Feb 20, 2024

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docx

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CHAPTER 8 -~ - 5. I.O4 Elliott has the following capital gain and loss transactions for 2023: Short-term capital gain $ 1,500 Short-term capital loss (3,600) Long-term capital gain (28%) 12,000 Long-term capital gain (25%) 4,800 Long-term capital gain (15%) 6,000 Long-term capital loss (28%) (4,500) Long-term capital loss (15%) (9,000) After the capital gain and loss netting process, what is the amount and character of Elliott’s net capital gain or loss? Problem 5 Elliott first nets the short-term gains and losses against each other and the long-term gains and losses against each other. There is a net short-term capital loss of $2,100 ($1,500 - $3,600). The 28% long-term items are netted and leave a net $7,500 28% gain. The 0%/15%/20% items are netted and leave a $3,000 loss. That loss is netted against the $7,500 28% gain, leaving a $4,500 28% gain. That gain is offset against the $2,100 short-term capital loss, leaving a $2,400 28% gain and a $4,800 25% gain for a total long-term capital gain of $7,200. STCG 1,500 LTCG 28% 12,000 STCL (3,600) LTCL 28% (4,500) (2,100) 7,500 4,500 2,400 LTCG 25% 4,800 LTCG 15% 6,000 LTCL 15% (9,000) (3,000)

6. [LO.6,7 Renata Corporation purchased equipment in 2021 for $180,000 and has taken $83,000 of regular MACRS depreciation. Renata Corporation sells the equipment in 2023 for $110,000. What is the amount and character of Renata’s gain or loss? Problem 6 Renata’s equipment gain is subject to § 1245 depreciation recapture. The property had an adjusted basis of $97,000 ($180,000 cost - $83,000 depreciation). The gain is $13,000 ($110,000 selling price — $97,000 adjusted basis) and is all ordinary gain due to recapture because the gain is less than or equal to the depreciation taken. 10. [HO.7 In a § 1031 like-kind exchange, Rafael exchanges a business building that originally cost $200,000. On the date of the exchange, the building given up has an adjusted basis of $85,000 and a fair market value of $110,000. Rafael pays $15,000 and receives a building with a fair market value of $125,000. What is the amount and character of Rafael’s gain or loss? Problem 10 Rafael has no recognized gain or loss. There was a realized gain of $25,000 ($110,000 value - $85,000 adjusted basis) on the property relinquished, but because no boot was received, none of the gain is recognized. However, the unrecaptured § 1250 gain (25% gain) potential of $115,000 (equal to the depreciation taken) carries over to the replacement property.

12. [HO.1 Alison owns a painting that she received as a gift from her aunt 10 years ago. The aunt created the painting. Alison has displayed the painting in her home and has never attempted to sell it. Recently, a visitor noticed the painting and offered Alison $5,000 for it. If Alison decides to sell the painting, what tax issues does she face? Problem 12 Because Alison received the property by gift, her tax basis is determined by whether the fair market value of the painting exceeded her aunt’s tax basis at the time of the gift. If this is the case, Alison has a carryover basis for the painting equal to her aunt’s basis for the painting. Most likely, her aunt had a zero tax basis for the painting because none of the costs of creating the painting were capitalized. Therefore, the painting was worth more than the donor’s basis at the time of the gift and Alison has a zero tax basis for it. Her aunt’s holding period also carries over to Alison. But because Alison has held the painting more than one year, the holding period for Alison is more than one year regardless of her aunt’s holding period. The painting is an ordinary asset, not a capital asset, for Alison because she received a creative work from its creator, her aunt. Consequently, Alison will have ordinary gain equal to the $5,000 selling price if she decides to sell the painting.

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