Chapter 10 Property Dispositions

1.
[LO 1] Compare and contrast different ways in
which a taxpayer triggers a realization event by disposing of an asset.

2.
[LO 1] Potomac Corporation wants to sell a
warehouse that it has used in its business for 10 years. Potomac is asking $450,000 for the
property. The warehouse is subject to a
mortgage of $125,000. If Potomac accepts
Wyden Inc.’s offer to give Potomac $325,000 in cash and assume full
responsibility for the mortgage on the property, what amount does Potomac
realize on the sale?

3.
[LO 1] Montana Max sells a 2,500-acre ranch for
$1,000,000 in cash, a note receivable of $1,000,000, and debt relief of
$2,400,000. He also pays selling
commissions of $60,000. In addition, Max
agrees to build a new barn on the property (cost $250,000) and spend $100,000
upgrading the fence on the property before the sale. What is Max’s amount realized on the sale?

4.
[LO 1]
Hawkeye sold farming equipment for $55,000.
It bought the equipment four years ago for $75,000, and it has since
claimed a total of $42,000 in depreciation deductions against the asset. Explain how to calculate Hawkeye’s adjusted
basis in the farming equipment.

5.
[LO 1]
When a taxpayer sells an asset, what is the difference between realized and
recognized gain or loss on the sale?
6.
[LO 2]
What does it mean to characterize a gain or loss? Why is characterizing a gain or loss
important?
7.
[LO 2]
Explain the difference between ordinary, capital, and §1231 assets.

8.
[LO 2]
Discuss the reasons why individuals generally prefer capital gains over
ordinary gains. Explain why corporate
taxpayers might prefer capital gains over ordinary gains.

9.
[LO 2] Dakota Conrad owns a parcel of land he
would like to sell. Describe the
circumstances in which the sale of the land would generate §1231 gain or loss,
ordinary gain or loss, or capital gain or loss. Also describe the circumstances
where Dakota would not be allowed to deduct a loss on the sale.

10.
[LO 2] Lincoln has used a piece of land in her
business for the past five years. The
land qualifies as §1231 property. It is
unclear whether Lincoln will have to recognize a gain or loss when she eventually
sells the asset. She asks her accountant
how the gain or loss would be characterized if she decides to sell. Her accountant said that selling §1231 assets
gives sellers “the best of both worlds.” Explain what her accountant means by
“the best of both worlds.”

11.
[LO 3] Explain Congress’s rationale for
depreciation recapture.

12.
[LO 3]
Compare and contrast §1245 depreciation recapture and §1250 depreciation
recapture.

13.
[LO 3] Why is depreciation recapture not
required when assets are sold at a loss?

14.
[LO 3] What are the similarities and differences
between the tax benefit rule and depreciation recapture?

15.
[LO 3, 4] Are both corporations and individuals
subject to depreciation recapture when they sell depreciable real property at a
gain? Explain.