- Which of the following is correct regarding the basis of property acquired by gift and later sold by the donee?
Answer: If the gift-date fair market value is less than the donor's adjusted basis, the donee uses the donor's basis for gain and the gift-date fair market value for loss.
IRC § 1015(a) provides that the donee's basis is generally the donor's adjusted basis; when the gift-date fair market value is less than that basis, the basis for determining loss is the gift-date fair market value. Treas. Reg. § 1.1015-1(a)(2) is consistent. Choice D states the dual-basis rule. Choice A is too broad: the loss basis is the gift-date fair market value, and the gift-tax adjustment under § 1015(d)(6) is limited to gift tax attributable to the net appreciation in the gift. Choice B incorrectly substitutes a fair market value basis, which section 1015 does not use for appreciated gift property. Choice C misstates the between-bases result: when the amount realized falls between the donor's adjusted basis and the lower gift-date fair market value, the donee recognizes no gain or loss.
- What are the tax consequences of the December 2025 transactions?
Answer: No loss is recognized in 2025; the replacement shares have a $6,700 basis.
IRC §1091(a) disallows a loss from a sale of stock if, within 30 days before or after the sale, the taxpayer acquires substantially identical stock. The $2,500 loss ($6,500 - $4,000) is disallowed because she bought 100 shares of the same stock nine days later. Under IRC §1091(d), the disallowed loss is added to the basis of the replacement shares: $4,200 + $2,500 = $6,700, and the replacement shares' holding period includes the holding period of the sold shares. Choice A recognizes the loss but keeps replacement basis at cost. Choice C disallows the loss but fails to increase basis, converting a temporary deferral into a permanent loss of the deduction. Choice D both recognizes the loss and increases the basis, allowing a double benefit.
- What is the correct tax treatment of the sale?
Answer: $15,000 ordinary income and $5,000 short-term capital gain.
Under IRC §422(a), the favorable ISO treatment applies only if the taxpayer does not dispose of the stock within two years after grant or within one year after transfer. Here the sale occurred less than one year after exercise, so it is a disqualifying disposition. Under IRC §421(b), the bargain element — the excess of FMV at exercise over the option price — is compensation: 1,000 × ($25 - $10) = $15,000. The holding period for the stock begins at exercise, so the additional gain, 1,000 × ($30 - $25) = $5,000, is short-term capital gain. Choice A treats the sale as a qualifying ISO disposition. Choice B treats the entire gain as compensation and ignores the capital gain component. Choice D treats the post-exercise gain as long-term, but the shares were held less than one year after exercise.
- What are the tax consequences of the exchange?
Answer: Recognized gain $40,000; basis in the replacement building $300,000.
IRC §1031(a) defers gain on like-kind exchanges of property held for business or investment. IRC §1031(b) requires gain recognition to the extent of boot received. A net reduction in mortgage debt is boot: she was relieved of $100,000 but assumed $60,000, so she received $40,000 of boot. Realized gain is $200,000 ($460,000 FMV received + $40,000 net debt relief - $300,000 adjusted basis). Recognized gain is the lesser of realized gain or boot, $40,000. Under IRC §1031(d), the replacement basis is the old adjusted basis ($300,000) minus boot received ($40,000) plus gain recognized ($40,000), or $300,000. Choice A uses FMV basis instead of substituted basis. Choice B ignores the debt relief as boot. Choice C treats the exchange as fully taxable and ignores §1031.
- In 2025, a taxpayer sold undeveloped land held for investment to an unrelated buyer for $300,000. The buyer paid $50,000 cash, assumed the $50,000 mortgage on the land, and gave a note for $200,000 bearing adequate stated interest, payable in annual principal installments beginning in 2026. The taxpayer's adjusted basis in the land was $120,000, and selling expenses were $30,000. The taxpayer did not elect out of the installment method. What amount of gain must be reported for 2025?
Answer: $30,000
Authority: IRC § 453. Gross profit is $300,000 - $120,000 - $30,000 = $150,000. Because the assumed mortgage of $50,000 does not exceed the adjusted basis, it reduces the contract price to $250,000 and is not a payment in the year of sale. Gross profit percentage is $150,000 / $250,000 = 60%. The only 2025 payment is the $50,000 cash down payment, so recognized gain is 60% x $50,000 = $30,000. Choice A ($30,000) is correct. Choice B ($36,000) omits the selling expenses, producing a 72% gross profit percentage. Choice C ($50,000) treats the cash down payment as entirely gain. Choice D ($60,000) treats the assumed mortgage as an additional current payment.
- In 2025, a taxpayer exchanged a rental building (adjusted basis $200,000, fair market value $500,000, subject to a $100,000 mortgage) for another rental building (fair market value $450,000, subject to an $80,000 mortgage) plus $30,000 cash. The exchange qualified as a like-kind exchange under IRC § 1031. What amount of gain must the taxpayer recognize?
Answer: $50,000
Authority: IRC § 1031(b) and (d). Amount realized is $450,000 (FMV of replacement building) + $30,000 cash + $20,000 net mortgage relief ($100,000 - $80,000) = $500,000. Realized gain is $500,000 - $200,000 adjusted basis = $300,000. Boot received is $30,000 cash + $20,000 net mortgage relief = $50,000. Recognized gain is the lesser of realized gain ($300,000) and boot ($50,000), so Choice B ($50,000) is correct. Choice A ($0) treats the exchange as wholly tax-free and ignores boot. Choice C ($250,000) is the deferred gain, not the recognized gain. Choice D ($300,000) is the realized gain before applying the boot limitation.
- What is the correct treatment of her gain on the 2025 sale?
Answer: $10,000,000 is excluded and $1,900,000 is taxable as long-term capital gain.
IRC §1202(a)(4) excludes 100% of gain on qualified small business stock acquired after September 27, 2010, and held more than five years. IRC §1202(b)(1) caps the exclusion at the greater of $10,000,000 or 10 times the adjusted basis of the stock. Here the gain is $11,900,000 ($12,000,000 - $100,000), and 10 times basis is $1,000,000. The greater cap is $10,000,000, so $10,000,000 is excluded and $1,900,000 is taxable as long-term capital gain. Choice A ignores the §1202(b) dollar cap. Choice B applies the old 50% exclusion ratio applicable to stock acquired in earlier years. Choice D uses 10 times basis as the cap, but it is not the greater amount.
- Which of the following correctly describes the daughter's income tax treatment of the sale?
Answer: She recognizes no gain or loss because her basis for gain is $80,000 and her basis for loss is $60,000.
IRC §1015(a) provides that gifted property takes the donor's adjusted basis, but Treas. Reg. §1.1015-1(a)(2) provides a special loss-basis rule: if the fair market value on the date of the gift is less than the donor's adjusted basis, the donee's basis for loss is that fair market value. Here the daughter's basis for gain is $80,000 and her basis for loss is $60,000. Because the $70,000 sale price is below the gain basis and above the loss basis, she recognizes neither gain nor loss. Choice A uses the FMV basis for a gain computation when the donor's basis is higher. Choice B uses the carryover basis for a loss computation when the FMV-at-gift basis controls. Choice C confuses the §102 exclusion of the gift itself with the tax consequences of the donee's later sale.
- What is the total additional federal tax resulting from this gain, including the net investment income tax?
Answer: The additional federal tax is $37,600.
Long-term capital gain rates are stacked on taxable income. For 2025, the 0% rate ends at $48,350 for single taxpayers and the 15% rate ends at $533,400 under IRC §1(h). Because taxable income before the gain is already above the 0% bracket and total taxable income of $250,000 is below the 20% threshold, the entire gain is taxed at 15%. The gain is also net investment income; her MAGI exceeds the $200,000 single threshold by $220,000, so the full gain is subject to the 3.8% NIIT under IRC §1411. Additional tax = ($200,000 × 15%) + ($200,000 × 3.8%) = $30,000 + $7,600 = $37,600. Choice B omits the NIIT. Choice C applies the 20% capital gain rate without NIIT. Choice D applies both the 20% rate and NIIT, but total taxable income is below the $533,400 20% threshold.
- Which of the following is correct regarding a like-kind exchange under IRC § 1031?
Answer: Real property held for business or investment use qualifies for nonrecognition if exchanged solely for like-kind real property; inventory and property held primarily for personal use do not.
IRC § 1031(a)(1) provides nonrecognition for an exchange of real property held for productive use in a trade or business or for investment if the property is exchanged solely for like-kind real property, and IRC § 1031(a)(2) excludes inventory and other property held primarily for sale. Choice C states that eligibility rule. Choice A misstates the boot rule: boot received in an otherwise qualifying exchange is taxable to the extent of realized gain even if reinvested. Choice B misstates the inventory exclusion: inventory and property held primarily for sale do not qualify under § 1031 regardless of the character of the property received. Choice D misstates the nonrecognition rule: losses are also not recognized on like-kind real property, so a taxpayer cannot selectively recognize a loss while deferring gain.
- Which of the following is correct regarding the exclusion of gain from the sale of a principal residence for 2025?
Answer: A qualifying taxpayer may exclude gain from the sale of a principal residence, but the exclusion does not apply to gain attributable to depreciation adjustments for periods after May 6, 1997.
IRC § 121(a) and (b)(1) permit a qualifying taxpayer to exclude gain from the sale of a principal residence, and IRC § 121(d)(6) provides that the exclusion does not apply to gain attributable to depreciation adjustments for periods after May 6, 1997. Choice A correctly states that rule. Choice B misstates the married-filing-jointly rule of IRC § 121(b)(2)(A): only one spouse must satisfy the ownership test, and both spouses must satisfy the use test. Choice C misstates the frequency rule of IRC § 121(b)(3): the prior-sale bar runs for two years, not five years, and a reduced exclusion may be available for certain sales. Choice D is wrong because claiming a home office deduction does not disqualify the residence; it only makes the depreciation-related portion of the gain ineligible for the exclusion.
- Which of the following is correct regarding a wash sale of stock or securities?
Answer: When a loss is disallowed, the disallowed loss is added to the basis of the replacement stock or securities, and the replacement's holding period includes the holding period of the stock or securities sold.
IRC § 1091(a) and (d); IRC § 1223(3). A loss on a sale of stock or securities is disallowed if the taxpayer acquires substantially identical stock or securities within 30 days before or 30 days after the sale, a 61-day window. Under § 1091(d), the disallowed loss is reflected in the basis of the replacement stock or securities, and under § 1223(3) the holding period of the stock or securities sold is added to the holding period of the replacement. Choice B is correct. Choice A is wrong because the window includes acquisitions in the 30 days before the sale as well as the 30 days after it. Choice C is wrong because § 1091 applies to stock or securities generally, and it expressly covers contracts or options to acquire substantially identical stock or securities. Choice D is wrong because the disallowed loss is not held in suspense as a separate carryover; it is preserved through the basis adjustment to the replacement property and recovered when that property is sold.
- What amount of gain from the sale must she include in gross income for 2025?
Answer: $12,000 is includible as unrecaptured §1250 gain; the remaining $190,000 gain is excluded under IRC §121.
IRC §121(b)(2) generally excludes up to $250,000 of gain on a single taxpayer's sale of a principal residence after the 2-of-5-year ownership and use test is met. IRC §121(d)(6) provides an exception: the exclusion does not apply to gain attributable to depreciation adjustments allowable after May 6, 1997. Amount realized is $490,000 ($520,000 - $30,000), adjusted basis is $288,000 ($300,000 - $12,000), and total gain is $202,000. The $12,000 depreciation portion is not excludable and is unrecaptured §1250 gain under IRC §1(h)(1)(D), not ordinary income. The remaining $190,000 is within the exclusion. Choice A ignores the depreciation exception. Choice C misclassifies residential real estate depreciation as §1245 ordinary income. Choice D treats the home office as disqualifying the entire exclusion; an office within the dwelling unit needs no allocation of gain (Treas. Reg. § 1.121-1(e)), so only the depreciation is taxable.
- In 2025, a taxpayer bought 100 shares of LKM Corporation for $4,000. On March 3, 2025, the taxpayer sold all 100 shares for $2,500. On March 10, 2025, the taxpayer bought 20 shares of LKM Corporation for $1,000. The taxpayer had no other capital transactions during 2025. What amount of loss may the taxpayer deduct on the 2025 return?
Answer: $1,200
Authority: IRC § 1091(a) and (d). The March 10 purchase of 20 shares of the same stock within 30 days after the sale means 20 of the 100 shares sold are replacement shares. The realized loss is $4,000 - $2,500 = $1,500. The disallowed loss is 20/100 x $1,500 = $300. The remaining $1,200 is deductible; because the taxpayer had no other capital transactions, it is the net capital loss reported on Schedule D. Choice C ($1,200) is correct. Choice A ($0) treats the entire loss as disallowed because a wash sale occurred. Choice B ($300) reports the disallowed amount as the deductible loss. Choice D ($1,500) ignores the wash-sale rule entirely.
- Which of the following is correct regarding an installment sale under IRC § 453?
Answer: Under the installment method, gain from an installment sale is reported as payments are received, but recapture income under § 1245 or § 1250 is recognized in the year of sale to the extent of the gain.
IRC § 453(a) generally requires gain from an installment sale to be reported as payments are received, and IRC § 453(i) provides that recapture income under § 1245 or § 1250 is recognized in the year of disposition notwithstanding the installment method. Choice C states this rule. Choice A reverses the default rule: the installment method applies automatically unless the taxpayer elects out on a timely filed return. Choice B reverses the gross profit ratio; it is gross profit divided by contract price. Choice D misstates the dealer-disposition rule: installment reporting is not available for sales of inventory or personal property by a person who regularly sells that property.
