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```					                                                       Solutions for Questions and Problems – Chapter 7           177

CHAPTER 8

CAPITAL GAINS AND LOSSES

Group 1 - Multiple Choice Questions

1.    C    (Section 8.1)                                 10. C      (Section 8.10)
2.    E    (Section 8.1)                                 11. D      (\$12,000 + 3,000)
3.    E    (\$77,500 – 55,000)                                       (Section 8.10)
(Section 8.3)                                 12. E      (\$190,000 – 11,000 – 45,000)
4.    C    (Section 8.4)                                            – \$250,000))
5.    C    8,963 + (15% x \$50,000)                                  (Section 8.12)
(Section 8.4)                                 13.   D    (Section 8.8)
6.    C    (10% x \$16,050) + (15% x \$13,950)             14.   D    (Sections 8.6, 8.7)
+ (15% x \$35,100) + (25% x                    15.   B    (Sections 8.6, 8.7)
\$4,900)                                       16.   E    (Section 8.7)
(Section 8.4)                                 17.   A    (Section 8.12)
7.    C    \$30,000 + \$4,000 + \$2,000                     18.   B    (Section 8.12)
– \$5,000 (Section 8.4)                        19.   A    (Section 8.12)
8.    A    (Section 8.6)                                 20.   B    (\$550,000 – 350,000) –
9.    D    ((\$150,000 – 90,000)                                     (18/24 x \$250,000)
/ 150,000) x 30,000)                                     (Section 8.12)
(Section 8.9)

Group 2 - Problems

1.   a.   \$11,000 short-term capital gain = \$25,000 – 14,000.
b.   \$11,000 long-term capital gain. (Sections 8.1, 8.2, 8.3)

2.   a.   \$128,500 = \$30,000 + 105,000 – 6,500.
b.   \$0 taxable gain; the \$53,500 gain (\$128,500 – \$75,000) is excluded from taxable income
(Sections 8.3, 8.12)

3.   \$640,000 = \$750,000 + 40,000 – 150,000. (Section 8.3)

4.   a.   \$4,000 gain = \$12,500 – 8,500
b.   \$3,900 loss = \$4,600 – 8,500. Notice that since the fair market value of the gifted property
exceeded the basis of the property at the date of the gift, the recipient’s basis for gain and loss
is the same in both calculations (Section 8.3)

5.   Sears stock         \$10,000 – 13,000 = \$3,000 long-term capital loss
Home Depot stock \$1,500 – 1,000 = \$500 long-term capital gain
Net long-term capital loss = \$2,500
Ford Motor bonds \$35,000 – 30,000 = \$5,000 short-term capital gain
Short-term capital gain = \$2,500 (\$2,500 net long-term capital loss and \$5,000 net short-term
capital gain). (Sections 8.1, 8.2, 8.3, 8.4)

177
178    Chapter 8 – Capital Gains and Losses

6. a.     \$3,000. The amount of an individual taxpayer’s net capital losses which may be deducted against
ordinary income is limited to \$3,000 annually.
b.    \$44,000 long-term capital loss carryforward = \$45,000 – 1,000.
\$0 short-term capital loss carryforward = \$2,000 – 2,000.
c.    The long-term loss may be carried forward indefinitely. (Section 8.5)

7. See Schedule D on page 179. (Sections 8.1, 8.2, 8.3, 8.5)

8. See Form 4797 on page 181. (Sections 8.3, 8.6)

9. a.     \$77,500 gain = \$130,000 + 55,000 + 45,000 – 152,500.
b.     See Form 6252 on page 183.
c.     \$2,095 = 41.89% (from Form 6252, Part II) x \$5,000. (Sections 8.3, 8.9)

10. a.     \$60,000. The gain recognized is equal to the lesser of the gain realized, \$60,000 (\$100,000 +
50,000 + 20,000 – 110,000), or the boot received, \$70,000 (\$20,000 cash + 50,000 relief of a
liability).
b.   \$100,000 = \$110,000 – 70,000 + 60,000. The basis of the property received is equal to the basis
of the property given up plus the boot paid (\$0 in this case) less the boot received plus the gain
recognized. (Section 8.10)

11. a.     \$0. No gain is recognized since the amount of the insurance proceeds was fully reinvested.
b.     \$285,000 = \$425,000 – 140,000. The basis is equal to the newly acquired property’s cost reduced
by the amount of the realized gain which is not recognized. (Section 8.11)

12. a.     \$44,000 realized gain (\$144,000 – 10,500 – 5,500 – 84,000).
b.     \$ -0- recognized gain since he may exclude up to \$250,000 from his sale of his personal residence.
c.     \$148,000 adjusted basis of new residence. (Section 8.12)

13. a.     \$19,000 = \$35,000 – 16,000.
b.     \$35,000 = \$19,000 + 16,000. The recomputed basis is equal to the adjusted basis plus the Section
1245 recapture potential.
c.    \$6,000 = \$25,000 – 19,000. The ordinary income under Section 1245 is equal to the lesser of
(1) the recomputed basis (\$35,000) less the adjusted basis (\$19,000); or (2) the amount realized
(\$25,000) less the adjusted basis (\$19,000).
d.    \$0. The entire gain recognized of \$6,000 (\$25,000 – 19,000) is ordinary income. (Section 8.7)

14. \$7,500 ordinary loss. Assuming this is the taxpayer’s only casualty gain or loss as a result of the
destruction of business or investment property, the loss on the destruction of the machine is an ordinary
loss. (Section 8.8)

15. \$5,200 casualty loss, before considering the 10% of adjusted gross income limitation. The \$5,200 loss
is computed as follows: \$6,000 loss – \$100 floor = \$5,900 loss, plus \$700 casualty gain on the second
item of personal property (\$1,200 insurance proceeds – \$500 adjusted basis). The loss is an itemized
deduction, subject to the 10 percent of adjusted gross income limitation. (Section 8.8)

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