Question

The following information applies to the questions displayed below.] Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $22,500 §1231 loss on the sale. The second is land that will generate a $7,400 §1231 gain on the sale. Aruna’s ordinary marginal tax rate is 32 percent.(Input all amounts as positive values.)

a.     Assuming she sells both assets in December of year 1 (the current year), what effect will the sales have on Aruna’s tax liability?

b. Assuming that Aruna sells the land in December of year 1 and the machinery in January of year 2, what effect will the sales have on Aruna’s tax liability for each year?

Required information

[The following information applies to the questions displayed below.] Kase, an individual, purchased some property in Potomac, Maryland, for $152,000 approximately 10 years ago. Kase is approached by a real estate agent representing a client who would like to exchange a parcel of land in North Carolina for Kase’s Maryland property. Kase agrees to the exchange. What is Kase’s realized gain or loss, recognized gain or loss, and basis in the North Carolina property in each of the following alternative scenarios? (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

a. The transaction qualifies as a like-kind exchange and the fair market value of each property is $710,000.

      b. The transaction qualifies as a like-kind exchange and the fair market value of each property is $116,000.

      

Answer 1

a.
	Amount	Tax Rate	Tax amount
Loss on sale of machinery(Ordinary Loss)	($22,500)	32%	($7,200)
Gain on sale of land(ordinary gain)	$7,400	32%	$2,368
Net decrease in Tax			($4,832)
Aruna's tax liability will decrease by $ 4,832
b.
	Amount	Tax Rate	Tax amount
Gain on sale of land (Capital gain) Year 1	$7,400	15%	$1,110
Loss on sale of machinery (Ordinary Loss) Year 2	($22,500)	32%	($7,200)
Net decrease in Tax			($6,090)
Aruna's tax liability will decrease by $ 6,090