Solutions to Chapter 7 Problem Assignments
Check Your Understanding
3. Realized vs. Recognized Gain Explain the difference between a realized gain and a recognized gain. Solution: A realized gain is the excess of the amount realized on a sale or exchange over the adjusted basis of the property sold or exchanged. The recognized gain is the amount of this realized gain that will be treated as income and subject to tax on the seller’s income tax return.
4. Asset Classification What type of assets are Section 1231 assets? What type of assets are capital assets? What type of assets are ordinary income assets? Give several examples of each type of asset. Solution: The most common Section 1231 assets are depreciable realty
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5. Recapture Why do taxpayers have to recapture depreciation on depreciable assets sold at a gain? To which assets do the Section 1245 and 1250 recapture provisions apply? Solution: Taxpayers deduct depreciation expenses against ordinary income resulting in a tax savings equal to the depreciation expense times the ordinary income marginal tax rate. Without recapture, all of the gain that is realized and recognized on the disposition of a depreciable asset would be Section 1231 gain and could receive favorable tax treatment as long-term capital gain. To ensure that all or part of the gain that results from the basis reduction for depreciation is taxed at ordinary income rates, depreciation recapture was instituted. Section 1245 full recapture and Section 1250 partial recapture apply to depreciable property (including property on which Section 179 expensing was claimed) that has been disposed of at a gain (it does not apply to losses). Section 1245 property includes all depreciable personalty and Section 1250 applies to most depreciable realty.
7. Section 291 Recapture What is Section 291 recapture? Compare this to unrecaptured Section 1250 gains. Solution: Section 291, applicable only to corporations, requires corporations to recapture (tax as ordinary income) an additional amount of Section 1231 gain beyond the recapture amount required by the Section