Question

1. Which of the follow She following statements concerning the taxation of assets is correct? Ordinary income may qualify for a special 0% rate. Capital gains are always taxed at the taxpayers marginal tax rate. Section 1231 assets are taxed at ordinary rates, and losses are taxed at capital rates. Gains on Section 1231 assets are taxed at long-term capital gains tax rates, and losses are taxed at ordinary income tax rates. Which of the following statements correctly identifies when income is subject to tax? a. Capital gains must be realized before they can be recognized on a tax return. b. Realization occurs when the gain on an asset is reflected on the taxpayer's return. C. As a general rule, realized gains are not recognized unless a provision in the IRC requires recognition. d. Recognition occurs when an asset has been sold or exchanged. 3. All of the following are included in the amount realized upon disposition of an asset EXCEPT: a. The cash received. b. The fair market value of property received in the exchange. C. A transfer of obligation to pay debt from the seller to the buyer. d. The taxpayer's adjusted basis. Christopher purchased a home in Connecticut three years ago for $300,000. He had been working in Connecticut for the past 10 years. Yesterday, his employer decided to transfer him to the San Diego, California branch, effective next month. Unfortunately, the real estate market has weakened over the past few years, and years, and Christopher is only able to sell his home for 0,000. Which of the following statements correctly identifies his tax consequences of the $270,000. Which of the follow sale: n capital loss on his tax return. a. Christopher is not permitted to deduct the loss on his income tax return b. Christopher's loss will be reflected as a long-term capital loss on his tax C. Christopher's loss will be reflected as a short-term capital loss on his ta d. Christopher will recognize an ordinary loss of $30,000.

question 1 through 4 multiple choice

Answer 1

Part 1

Option D

d. Gains on section 1231 assets are taxed at long-term capital gains tax rates, taxed at capital rates, and losses are taxed at ordinary income tax rates.

A gain on the sale of Section 1231 assets is treated as long-term capital gain. A net section 1231 loss is deductible in the form of an ordinary loss.

Part 2

Option A

a. Capital gains must be realized before they can be recognized on a tax return.

According to IRS, before recognizing Capital gains on a tax return they must be realized.

Part 3

Option D

d. The taxpayer’s adjusted basis

amount realized upon the disposition of an asset includes cash received - seller’s expenses + buyer’s assumption of liabilities + FMV of property received in exchange

Part 4

Option A

a. Christopher is not permitted to deduct the loss on his income tax return.


The loss on the sale of the home is referred to as a personal loss, and thus it is not deductible. Only losses that are related to the active conduct of a trade or business, or with the production of income are deducted by individual taxpayers.