Chapter 8: Capital Gains and Losses Key
1. Accounts receivable are capital assets.
2. If property is received from a decedent, the taxpayer who receives the property has the same basis in the
property as the decedent.
3. If a capital asset acquired on October 27, 2001 is sold on April 30, 2011 for a gain, the gain is a long-term
capital gain.
4. Net short-term capital gains may be offset by net long-term capital losses.
5. A net long-term gain from the theft of a Section 1231 asset is treated as a Section 1231 gain.
6. Assuming a taxpayer has no other gains or losses for the year, a loss from the theft of a Section 1231 asset is
treated as a capital loss.
7. In a like-kind exchange, relief from a liability is treated as boot.
8. In 2011, the basis of a taxpayer’s replacement residence is equal to the cost of the replacement residence less
the gain which was deferred on the sale of the old residence.
9. To have the like-kind exchange provisions apply, a taxpayer must make an election.
10. The depreciation recapture provisions are designed to prevent taxpayers from converting capital gains into
ordinary income.
11. An artist’s painting is not a capital asset when held by the artist.
12. The first day a capital asset, acquired on August 31, 2011, may be sold for long-term capital gain or loss
treatment is September 1, 2012.
13. The basis of property received as an inheritance is generally equal to the fair market value at the date of
death.
14. If a taxpayer is relieved of a liability on the disposition of property, the amount of the liability should be
included in the amount realized on the sale or other disposition.
15. For income tax purposes, a realized loss has the same meaning as a recognized loss.
16. A taxpayer eligible to use the installment method for reporting gain on the sale of an asset must use the
installment method unless he or she elects out of the provision.
17. The exchange of shares of stock does not qualify for like-kind exchange treatment.
18. If a taxpayer sells his personal residence and purchases a new residence, realized gain may be recognized.
19. The taxpayer generally has only one year to replace involuntarily converted property in order to postpone
the recognition of gain.
20. Cows used in a farming business are Section 1245 property.
21. If not entirely used in one sale, the unused portion of the $250,000 exclusion on the sale of a taxpayer’s
principal residence may be used to reduce the recognized gain on the sale of the taxpayer’s next residence.
22. The condemnation of property is not an involuntary conversion, since it is done pursuant to a government
decree.
23. There is no limit on the amount of capital losses that an individual may deduct against ordinary income.
24. For 2011, long-term capital gains are not afforded preferential tax treatment.
25. A taxpayer’s personal automobile is a capital asset.
26. Taxpayers are allowed to offset net short-term capital losses with net long-term capital gains.
27. The exchange of inventory does not qualify for like-kind exchange treatment.
28. If a capital asset acquired August 5, 2011 is sold on February 6, 2012, any gain is a short-term capital gain.
29. If the proceeds from the sale of property will be collected over a period of more than one year, a taxpayer is
required to use the installment method.
30. The exclusion of gain on the sale of a personal residence may be elected only by a taxpayer who has owned
three or more residences.
31. The amount of ordinary income recognized on the sale of a Section 1245 asset is limited to the total gain
realized on the sale.
32. If insurance proceeds exceed the taxpayer’s basis in property destroyed by fire, the taxpayer may be required
to recognize a gain.
33. Which of the following is a capital asset?
34. An asset has an original basis of $25,000 and depreciation has been claimed for the asset in the amount of
$20,000. If the asset’s adjusted basis is $15,000, what is the amount of capital improvements that have been
made to the asset?
35. Which of the following assets is not a Section 1231 asset?
36. Perry acquired raw land as an investment in 1996. The land cost $60,000. In 2011, the land is sold for a total
sales price of $120,000, consisting of $10,000 cash and the buyer’s note for $110,000. If Perry elects to
recognize the entire gain in the year of sale, what is his recognized gain in 2011?
37. Perry acquired raw land as an investment in 1996. The land cost $60,000. In 2011, the land is sold for a total
sales price of $120,000, consisting of $10,000 cash and the buyer’s note for $110,000. Assume that Perry uses
the installment method to recognize the gain and receives only the $10,000 down payment in the year of sale.
How much gain should Perry recognize in 2011?
38. On December 31, 2011, Henry, a sole proprietor, sold for $65,000 a machine that was used in his business.
The machine had been purchased in 2003 for $50,000, and when it was sold it had an adjusted basis of $30,000.
For the year 2011, how should this gain be treated?
39. On August 8, 2011, Sam, age 62, sold for $210,000 his principal residence which had an adjusted basis of
$60,000. On November 1, 2011, he purchased a new residence for $80,000. For 2011, Sam should recognize a
gain on the sale of his residence of:
40. Bennett purchased a tract of land for $20,000 in 2004 when he heard that a new highway was going to be
constructed through the property and the land would soon be worth $200,000. The highway project was
abandoned in 2011 and the value of the land fell to $15,000. Bennett can claim a loss in 2011 of:
41. In 2011, Paul, a single taxpayer, has taxable income of $30,000 exclusive of capital gains and losses. Paul
incurred a $1,000 short-term capital loss and a $5,000 long-term capital loss. What is the amount of his long-
term capital loss carryover to 2012?
42. Martha has a net capital loss of $20,000 and other ordinary taxable income of $45,000 for the current tax
year. What is the amount of Martha’s taxable income after deducting the allowed capital loss?
43. Martha has a net capital loss of $20,000 and other ordinary taxable income of $45,000 for the current year.
What is the amount of Martha’s capital loss carryforward?
44. Joseph exchanged land (tax basis of $36,000), that he had held for 4 years as an investment, for similar land
valued at $40,000 which was owned by Adrian. In connection with this transaction, Adrian assumed Joseph’s
$12,000 mortgage. As a result of this transaction Joseph should report a long-term capital gain of:
45. Ben purchased an apartment building on January 1, 1994, for $200,000. The building has been depreciated
over the appropriate recovery period using the straight-line method. On December 31, 2011, the building was
sold for $220,000, when the accumulated depreciation was $62,500. Ben is in the highest tax bracket; on his
2011 tax return, he should report:
46. For the year 2011, Susan had salary income of $19,000. In addition she reported the following capital
transactions during the year:
Long-term capital gain
$7,000
Short-term capital gain
3,000
Long-term capital loss
-2,000
Short-term capital loss
-4,000
47. In January 2011, Keyaki Construction Company exchanged an old truck, which cost $54,000 and had
accumulated depreciation of $18,000, for a new truck having a fair market value of $65,000. In connection with
the exchange, Keyaki paid $35,000 in cash. What is the tax basis of the new truck?
A. $54,000
48. Sol purchased land as an investment on January 12, 2004, for $85,000. On January 31, 2011, Sol sold the
land for $20,000 cash. In addition, the purchaser assumed the mortgage of $70,000 on the land. What is the
amount realized (not gain realized) on the sale of the land?
49. Sol purchased land as an investment on January 12, 2004 for $85,000. On January 31, 2011, Sol sold the
land for $20,000 cash. In addition, the purchaser assumed the mortgage of $70,000 on the land. What is the
amount of the realized gain (or loss) on the sale?
50. Sol purchased land as an investment on January 12, 2004 for $85,000. On January 31, 2011, Sol sold the
land for $90,000 cash. What is the nature of the gain or loss?
51. Simon sold investment property 2 years ago for $750. Simon’s basis in the property was $300. Simon is
receiving $150 per year from the buyer. Simon reports this income on the installment method. If Simon collects
$150 in principal during the current year, how much gain should he report from the sale for the year?
52. For the 2011 tax year, Morgan had $25,000 of ordinary income. In addition, he had an $1,800 long-term
capital loss and a $1,500 short-term capital loss. What will be the amount of Morgan’s capital loss carryforward
to 2012?
A. $0
53. Which of the following is true about capital gains?
A. Short-term capital gains are not netted with other capital gains and losses.
54. An asset’s adjusted basis is computed as:
55. The adjusted basis of an asset may be determined by the
56. Which of the following statements is correct with respect to the deferral provisions of the Tax Code?
57. Terry has a casualty gain of $1,000 and a casualty loss of $5,400, before the $100 floor and before the
adjusted gross income limitation. The gain and loss were the result of two separate casualties occurring during
2011 and both properties were personal-use assets. If Terry itemizes deductions on her 2011 return and has
adjusted gross income of $25,000, what is Terry’s gain or net itemized deduction as a result of these casualties?
60. In December, 2011, Ben and Jeri (married, filing jointly) have a long-term capital gain of $55,000 on the
sale of stock held for 4 years. They have no other capital gains and losses for the year. After standard deduction
and personal exemptions, their ordinary income for the year is $69,000, making their total income for the year
$124,000, ($69,000 + $55,000). In 2011, married taxpayers pay tax of $9,500 at 10 percent and 15 percent rates
(from the tax table) on the first $69,000 of ordinary taxable income and 25 percent on ordinary taxable income
up to $139,350. What is their total tax liability?
61. In 2011, Marc, a single taxpayer, has ordinary income of $35,000. In addition, he has $3,000 in short-term
capital gains, short-term capital losses of $6,000, and long-term capital gains of $4,000. What is Marc’s AGI for
2011?
62. Simonne, a single taxpayer, bought her home in La Jolla 25 years ago for $45,000. She has lived
continuously in the home since she purchased it. In December, 2011, she sells her home for $405,000. What is
Simonne’s taxable gain on the sale?
63. Jerry bought his home 15 years ago for $60,000. Three years ago Jerry married Debbie and she moved into
the same house and has lived there since. If they sell Jerry’s house in December, 2011 for $340,000, what is
their taxable gain on a joint tax return?
64. Sally acquired an apartment building in 1998 for $150,000 and sold it for $400,000 in 2011. At the time of
the sale, there is $55,000 of accumulated straight-line depreciation on the apartment building. Assuming Sally is
in the highest tax bracket for ordinary income, how much of her gain is taxed at 15 percent?
A. None
65. Which of the following is a capital asset?