SEE - Special Enrollment Exam Quiz: Business Assets And Transactions
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Business Assets And TransactionsQuestion 1 of 14

In 2025, a sole proprietor exchanged a commercial warehouse used in her business for another commercial warehouse to be used in her business, in a transaction that qualified under §1031. The warehouse she gave up had a fair market value of $800,000, an adjusted basis of $400,000, and was subject to a $200,000 mortgage that the other party assumed. The warehouse she received had a fair market value of $650,000 and was subject to a $100,000 mortgage that she assumed. She also received $50,000 in cash.

What amount of gain is recognized on the exchange, and what is the basis of the replacement warehouse?

$250,000 of recognized gain; $500,000 basis in the replacement warehouse.
$50,000 of recognized gain; $300,000 basis in the replacement warehouse.
$100,000 of recognized gain; $350,000 basis in the replacement warehouse.
$150,000 of recognized gain; $400,000 basis in the replacement warehouse.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Business Assets And Transactions

Practice Business Assets And Transactions in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Business Assets And Transactions, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

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Question 1

In 2025, a sole proprietor exchanged a commercial warehouse used in her business for another commercial warehouse to be used in her business, in a transaction that qualified under §1031. The warehouse she gave up had a fair market value of $800,000, an adjusted basis of $400,000, and was subject to a $200,000 mortgage that the other party assumed. The warehouse she received had a fair market value of $650,000 and was subject to a $100,000 mortgage that she assumed. She also received $50,000 in cash.

What amount of gain is recognized on the exchange, and what is the basis of the replacement warehouse?

  1. $250,000 of recognized gain; $500,000 basis in the replacement warehouse.
  2. $50,000 of recognized gain; $300,000 basis in the replacement warehouse.
  3. $100,000 of recognized gain; $350,000 basis in the replacement warehouse.
  4. $150,000 of recognized gain; $400,000 basis in the replacement warehouse. (correct answer)
Explanation: IRC §§ 1031(a), (b), and (d). The realized gain is 400,000(400,000 (800,000 − $400,000). Boot received equals the $50,000 cash plus the 100,000netmortgagerelief(100,000 net mortgage relief (200,000 relieved less the $100,000 assumed), so $150,000 of gain is recognized. The replacement basis is the old basis reduced by boot received and increased by gain recognized: $400,000 − $50,000 − $200,000 + $100,000 + $150,000 = $400,000. Choice A treats the full $200,000 of mortgage relief as boot and ignores the $100,000 mortgage assumed, overstating both gain and basis. Choice B treats only the $50,000 cash as boot, understating the recognized gain and basis. Choice C treats only the net mortgage relief as boot and omits the cash.

Question 2

In January 2025, a corporation purchased all of the operating assets of a sole proprietor's wholesale business for $1,000,000. The purchase contract allocated $400,000 to equipment, $200,000 to inventory, $250,000 to a commercial building, and $50,000 to a two-year covenant not to compete. The amounts stated for the equipment, inventory, building, and covenant equaled their fair market values, and the contract did not separately list goodwill or any other §197 intangible. The seller had created and operated the business for more than ten years.

How is the remaining $100,000 of the purchase price allocated and taxed?

  1. The buyer allocates it ratably among the equipment, inventory, and building; the seller reports ordinary income.
  2. The buyer allocates it to the covenant not to compete, amortizable over 15 years; the seller reports long-term capital gain.
  3. The buyer allocates it to goodwill, which is not amortizable; the seller reports ordinary income.
  4. The buyer allocates it to goodwill, amortizable over 15 years; the seller reports long-term capital gain. (correct answer)
Explanation: IRC § 1060 and Treas. Reg. § 1.1060-1 (residual method); IRC § 197(a). Under the residual method, consideration is allocated to each class of transferred assets up to fair market value, and any excess is allocated to Class VII goodwill and going-concern value. Here the equipment, inventory, building, and covenant have a total fair market value of $900,000, so the remaining $100,000 is allocated to goodwill. The buyer amortizes it ratably over 15 years as a §197 intangible, and the seller's gain on goodwill is long-term capital gain reported on Schedule D. Both parties report the allocation consistently on Form 8594. Choice A would ratably allocate the residual among tangible assets and inventory, a method §1060 does not permit. Choice B would assign the residual to the covenant, but the covenant was separately priced at its $50,000 fair market value; the residual is not allocated to a specifically priced Class VI intangible. Choice C is wrong because §197 goodwill is amortizable over 15 years and the seller's gain is capital, not ordinary.

Question 3

In 2025, a sole proprietor sold two assets used in her business that she had held for more than one year. A drill press purchased in 2021 for $100,000 was sold for $120,000; its adjusted basis on the sale date was $42,000. A parcel of land used in the business was sold for $60,000; its adjusted basis was $70,000. The taxpayer had no other §1231 transactions in 2025 and no §1231 losses in the previous five years.

How should the taxpayer report the two sales on her 2025 return?

  1. $58,000 of ordinary income and $10,000 of long-term capital gain. (correct answer)
  2. $58,000 of ordinary income and $20,000 of long-term capital gain.
  3. $48,000 of ordinary income and $20,000 of long-term capital gain.
  4. $78,000 of long-term capital gain, with no ordinary income.
Explanation: IRC §§ 1245(a) and 1231(a). The drill press sale produced 78,000ofgain(78,000 of gain (120,000 − $42,000). Its $100,000 cost minus its $42,000 adjusted basis reflects $58,000 of depreciation, so $58,000 is recaptured as ordinary income under §1245, and the remaining $20,000 is §1231 gain. The land sale produced a $10,000 §1231 loss. Because the §1231 gains exceed the §1231 losses and no prior-year unrecaptured §1231 losses exist, the $20,000 gain and $10,000 loss are netted, and the resulting $10,000 net gain is treated as long-term capital gain. Choice A is therefore correct. Choice B fails to reduce the §1231 gain by the land loss. Choice C treats the land loss as an ordinary loss against the §1245 recapture, but a §1231 loss must first be netted against §1231 gains and is absorbed in that netting here. Choice D treats the entire drill press gain as long-term capital gain, ignoring §1245 recapture, and also ignores the land loss.

Question 4

In 2025, a sole proprietor sold a piece of equipment he had used in his business for more than one year to his son for $18,000. The equipment had an adjusted basis of $30,000. The son immediately began using the equipment in his own business and, two months later, sold it to an unrelated party for $25,000. The son claimed no depreciation on the equipment.

Which of the following correctly states the tax consequences of these sales?

  1. The father may deduct the $12,000 loss, and the son recognizes a $7,000 gain on his sale.
  2. The father's $12,000 loss is disallowed, and the son's recognized gain on his sale is $7,000.
  3. The father's $12,000 loss is disallowed, and the son recognizes no gain on his sale. (correct answer)
  4. The father's $12,000 loss is disallowed, and the son's basis in the equipment is $30,000.
Explanation: IRC § 267(a)(1), (b)(1), (c)(4) and (d). A father and son are related parties, so the father's $18,000 - $30,000 = $12,000 loss on the sale to his son is disallowed. The son takes an $18,000 cost basis and realizes $25,000 - $18,000 = $7,000 of gain on the resale. Under § 267(d), the son recognizes that gain only to the extent it exceeds the father's disallowed loss; § 267(d) has no exception for property the transferee uses in a business. The $12,000 disallowed loss fully offsets the $7,000 gain, so the son recognizes no gain, and the remaining $5,000 of the father's loss is lost. Choice C is correct. Choice A ignores the related-party loss disallowance. Choice B ignores the § 267(d) offset by inventing a depreciable-property exception. Choice D gives the son the father's basis instead of his $18,000 cost.

Question 5

A sole proprietor purchased a machine for $40,000 in 2021 and used it in her business. By January 1, 2023, she had claimed $18,000 of depreciation on it, and its fair market value on that date was $20,000. On January 1, 2023, she permanently converted the machine to personal use. She sold it on June 30, 2025, for $21,000.

Which of the following correctly describes the tax result of the 2025 sale?

  1. The taxpayer realizes a $1,000 gain, which is long-term capital gain.
  2. The taxpayer realizes a $1,000 loss, which is not deductible because the machine was personal-use property when sold. (correct answer)
  3. The taxpayer realizes neither a gain nor a loss, because her loss basis is the $20,000 value at conversion.
  4. The taxpayer realizes a $1,000 loss, which is deductible as a § 1231 loss.
Explanation: IRC §§ 1001, 1011 and 165(c). Converting business property to personal use does not change its basis: the machine keeps its $40,000 - $18,000 = $22,000 adjusted basis. The $21,000 sale therefore realizes a $1,000 loss. Because the machine was held for personal use when sold, § 165(c) allows no deduction for the loss. Choice B is correct. Choice A measures gain from the $20,000 conversion-date value. Choice C applies the lower-of-basis-or-value rule, which governs property converted from personal use to business or rental use, not the reverse. Choice D treats the machine as § 1231 property, but it was personal-use property at the time of sale.

Question 6

A sole proprietor owns a commercial rental property with an adjusted basis of $500,000 and a fair market value of $800,000. The property is subject to a $100,000 mortgage. In a qualifying like-kind exchange in 2025, she transfers this property and receives a replacement commercial rental property with a fair market value of $800,000, subject to an $80,000 mortgage. She also pays $20,000 cash in the exchange and receives no cash or other property. What is her basis in the replacement property?

  1. $500,000 (correct answer)
  2. $700,000
  3. $720,000
  4. $800,000
Explanation: IRC §§ 1031(b), 1031(d). The exchange of commercial rental property qualifies for nonrecognition. Boot received is the $100,000 debt relief less the $80,000 debt assumed less the $20,000 cash paid, or 0,sonogainisrecognized.Thebasisofthereplacementpropertyistheoldadjustedbasis(0, so no gain is recognized. The basis of the replacement property is the old adjusted basis (500,000) plus gain recognized (0)pluscashpaid(0) plus cash paid (20,000) plus debt assumed (80,000)minusdebtrelief(80,000) minus debt relief (100,000), or 500,000.ChoiceB(500,000. Choice B (700,000) uses the equity in the old property ($800,000 − 100,000).ChoiceC(100,000). Choice C (720,000) uses the equity in the replacement property ($800,000 − 80,000).ChoiceD(80,000). Choice D (800,000) uses the replacement property's fair market value and ignores the carryover basis rules.

Question 7

In 2025, a calendar-year sole proprietor sold a delivery truck for $45,000. The truck had been held for more than one year; it had an adjusted basis of $20,000, and $30,000 of depreciation had been claimed. The sole proprietor also sold land used in the business for $50,000. The land had also been held for more than one year and had an adjusted basis of $30,000. In 2023, the business had a $10,000 section 1231 loss that has not yet been recaptured. There were no other section 1231 transactions in 2025. What amount of the combined gain is ordinary income?

  1. $25,000
  2. $35,000 (correct answer)
  3. $45,000
  4. $55,000
Explanation: IRC §§ 1245(a), 1231(b), 1231(c). The truck, held for more than one year and depreciated, is §1245 property. Its gain is 25,000(25,000 (45,000 − $20,000), and because that gain does not exceed the $30,000 of depreciation claimed, the entire $25,000 is ordinary income. The land, held for more than one year and used in the business, produced a 20,000§1231gain(20,000 §1231 gain (50,000 − $30,000). Under §1231(c), current net §1231 gain is treated as ordinary income to the extent of nonrecaptured §1231 losses from the preceding five years; the 2023 $10,000 loss is within that period. Thus $10,000 of the land gain is ordinary income, and the remaining $10,000 is treated as long-term capital gain. Total ordinary income is $25,000 + $10,000 = 35,000.ChoiceA(35,000. Choice A (25,000) omits the §1231(c) recapture of the prior loss. Choice C (45,000)treatsthelandgainasordinaryaswell.ChoiceD(45,000) treats the land gain as ordinary as well. Choice D (55,000) adds the prior §1231 loss to the current gains as if it were an additional ordinary-income item, rather than using it to recharacterize only $10,000 of current §1231 gain.

Question 8

On July 1, 2025, a sole proprietor sold an apartment building, including the land, for $1,250,000. The sales contract allocated $1,000,000 of the sales price to the building and $250,000 to the land, and the $50,000 of selling expenses was allocated $40,000 to the building and $10,000 to the land. She had bought the property on January 1, 2015, for $1,000,000, allocated $800,000 to the building and $200,000 to the land. She claimed $290,000 of straight-line depreciation on the building. There were no unrecaptured section 1231 losses from prior years. What amount of the gain is subject to the 25% maximum rate on unrecaptured section 1250 gain?

  1. $0
  2. $200,000
  3. $290,000 (correct answer)
  4. $490,000
Explanation: IRC § 1250(b) and IRC § 1(h)(6). The building amount realized is $1,000,000 − $40,000 = $960,000. The building's adjusted basis is $800,000 − $290,000 = $510,000, so the gain on the building is $450,000. Because the building was depreciated using straight-line, none of the gain is ordinary income under §1250. Unrecaptured §1250 gain is the depreciation allowed, 290,000,butnotmorethanthegainonthebuilding(290,000, but not more than the gain on the building (450,000); therefore Choice C (290,000)iscorrect.ChoiceA(290,000) is correct. Choice A (0) is the amount of ordinary §1250 recapture, not unrecaptured §1250 gain. Choice B (200,000)istheportionofthetotalgainremainingafterthedepreciationportion(200,000) is the portion of the total gain remaining after the depreciation portion (490,000 − 290,000),i.e.,theappreciationandlandgain,notthedepreciationrecaptureportion.ChoiceD(290,000), i.e., the appreciation and land gain, not the depreciation recapture portion. Choice D (490,000) treats the entire gain as unrecaptured §1250 gain, ignoring that only the depreciation portion carries the 25% rate. The land gain is $250,000 − $10,000 − $200,000 = $40,000, confirming total gain of $450,000 + $40,000 = $490,000.

Question 9

In 2025, a calendar-year sole proprietor owned a warehouse used in her business with an adjusted basis of $300,000. The warehouse was destroyed in a fire, and she received $500,000 of insurance proceeds. She used $450,000 of the proceeds to buy a replacement warehouse in 2025, and the replacement qualifies as similar property under section 1033. She makes the nonrecognition election.

What amount of gain must she recognize in 2025, and what is her basis in the replacement warehouse?

  1. $50,000 recognized gain; $300,000 basis (correct answer)
  2. $50,000 recognized gain; $450,000 basis
  3. $200,000 recognized gain; $300,000 basis
  4. $0 recognized gain; $500,000 basis
Explanation: IRC § 1033(a)(2) allows a taxpayer to elect nonrecognition when property is involuntarily converted into money and replacement property is purchased. Gain is recognized only to the extent the insurance proceeds are not reinvested, limited by the realized gain. The realized gain is 200,000(200,000 (500,000 proceeds minus $300,000 adjusted basis). The unreinvested proceeds are 50,000(50,000 (500,000 received minus $450,000 spent), so the recognized gain is $50,000. The basis of the replacement property is its $450,000 cost reduced by the $150,000 deferred gain, or $300,000. Choice B states the correct gain but fails to reduce the replacement basis by the deferred gain. Choice C recognizes the full realized gain even though nonrecognition applies to the reinvested portion. Choice D ignores the $50,000 of proceeds not reinvested and uses an incorrect basis.

Question 10

In 2025, a corporation purchases all of the operating assets of a sole proprietorship in a transaction that is an applicable asset acquisition under section 1060.

Which of the following statements is correct regarding the acquisition?

  1. Under the residual method, the consideration is allocated first to tangible personal property and real property; inventory and accounts receivable are assigned only after those assets are fully valued.
  2. Both the buyer and the seller must allocate the consideration under the residual method and attach Form 8594 to their income tax returns for the year of sale. (correct answer)
  3. Any excess of the purchase price over the total fair market value of the acquired assets is allocated to a covenant not to compete if one is present, and any remaining excess is allocated to goodwill.
  4. A written allocation agreement between the buyer and seller that departs from the residual method is binding on the IRS if it is attached to Form 8594.
Explanation: IRC § 1060(a) requires the residual method of allocation in an applicable asset acquisition, and the instructions to Form 8594 require both the transferor and the transferee to file the form with their income tax returns for the year of sale. The residual method assigns consideration among asset classes in a fixed order, with inventory and receivables assigned before tangible personal property and real property. A covenant not to compete is a class VI intangible assigned its fair market value before the residual amount is assigned to class VII goodwill and going concern value. Choice A misstates the class order. Choice C misstates the residual destination. Choice D misstates the effect of a buyer-seller allocation agreement; such an agreement is generally binding on the parties, but it is not binding on the IRS.

Question 11

In 2025, a sole proprietor sold manufacturing equipment used in her business for more than one year for $150,000. The buyer paid $30,000 at closing and gave an installment note for the $120,000 balance, bearing adequate stated interest and payable over four years. The equipment's adjusted basis on the sale date was $30,000, and depreciation of $90,000 had been claimed on it. The taxpayer had no other §1231 transactions in 2025 and no §1231 losses in the previous five years.

What amount of gain is recognized on the sale in 2025, and what is its character?

  1. $96,000, consisting of $90,000 of ordinary income and $6,000 of long-term capital gain. (correct answer)
  2. $120,000, consisting of $90,000 of ordinary income and $30,000 of long-term capital gain.
  3. $24,000, consisting of $18,000 of ordinary income and $6,000 of long-term capital gain.
  4. $96,000, all of which is ordinary income.
Explanation: IRC §§ 453(i), 453(c), and 1245(a). The total gain is 120,000(120,000 (150,000 − $30,000). Under §453(i), §1245 recapture is not deferred on an installment sale: $90,000 of ordinary income is recognized in the year of sale because the recapture equals the lesser of the $90,000 of depreciation or the gain. The remaining 30,000of§1231gainisdeferredundertheinstallmentmethod;thegrossprofitpercentageis2030,000 of §1231 gain is deferred under the installment method; the gross profit percentage is 20% (30,000 ÷ $150,000), so the $30,000 cash received in 2025 produces $6,000 of gain. Total 2025 gain is $96,000. Choice B accelerates the entire remaining §1231 gain, ignoring the installment method. Choice C applies the 80% gross-profit percentage to the entire gain, improperly deferring the recapture. Choice D mischaracterizes the deferred §1231 gain as ordinary income; for an individual, net §1231 gain is long-term capital gain.

Question 12

In 2025, a calendar-year taxpayer owns a commercial building that he rents out. Its fair market value is $800,000 and its adjusted basis is $600,000; the building is subject to a mortgage of $200,000. In an exchange with an unrelated party that qualifies as a like-kind exchange under section 1031, he transfers the building and receives a replacement rental building with a fair market value of $500,000, subject to a mortgage of $100,000, plus $200,000 cash. No other consideration is involved.

What amount of gain does the taxpayer recognize on the exchange?

  1. $0
  2. $100,000
  3. $200,000 (correct answer)
  4. $300,000
Explanation: IRC § 1031(b) requires gain to be recognized in a like-kind exchange to the extent of boot received, but not in excess of realized gain. The realized gain is 200,000(200,000 (800,000 amount realized minus $600,000 adjusted basis). Boot is $300,000: $200,000 cash plus 100,000netmortgagerelief(100,000 net mortgage relief (200,000 mortgage assumed by the transferee less the $100,000 mortgage the taxpayer assumes). Because boot exceeds the realized gain, the recognized gain is capped at $200,000. Choice A ignores the boot entirely. Choice B nets the cash against the mortgage assumed but omits the $200,000 mortgage relief. Choice D treats the full $300,000 boot as recognized without limiting it to the realized gain.

Question 13

On March 1, 2025, a calendar-year sole proprietor sold a machine used 100% in her business for $52,000. She had bought the machine for $80,000, had held it for more than one year, and had claimed $62,000 of MACRS depreciation on it. She sold no other section 1231 assets during 2025.

How should the $34,000 gain on the sale be reported?

  1. The entire $34,000 gain is long-term capital gain because the machine is a business capital asset.
  2. The entire $34,000 gain is section 1231 gain because the machine was held for more than one year.
  3. No gain is recognized because the $52,000 sale price is less than the $80,000 original cost.
  4. The entire $34,000 gain is ordinary income under section 1245, with no section 1231 gain. (correct answer)
Explanation: IRC § 1245(a)(1) provides that gain on the disposition of depreciable personal property is ordinary income to the extent of depreciation previously allowed, limited by the gain realized. The machine's adjusted basis is 18,000(18,000 (80,000 cost minus $62,000 depreciation), and the realized gain is $34,000. Because the recapture amount of $62,000 exceeds the gain, the entire gain is ordinary income; no gain remains for section 1231 treatment. Choice B ignores the recapture and relies only on the holding period. Choice C incorrectly compares the sale price to the original cost instead of the adjusted basis. Choice A misclassifies the asset; a machine used in a trade or business is not a capital asset.

Question 14

In 2025, a taxpayer sells a depreciable commercial building held for more than one year for $1,000,000. The building's adjusted basis immediately before the sale is $700,000. The building had $400,000 of depreciation claimed, of which $150,000 was the excess of accelerated depreciation over the straight-line amount that would have been allowed. He had no other section 1231 transactions in 2025.

What is the correct treatment of the $300,000 gain on the sale?

  1. $150,000 is ordinary income under section 1250, and the remaining $150,000 is section 1231 gain. (correct answer)
  2. The entire $300,000 gain is ordinary income under section 1250 because depreciation was claimed on the building.
  3. The entire $300,000 gain is section 1231 gain because section 1250 recapture applies only to residential rental property.
  4. The entire $300,000 gain is long-term capital gain because gains on depreciable business real property are capital gains.
Explanation: IRC § 1250(a) recaptures as ordinary income the lesser of the gain realized or the additional depreciation on depreciable real property, which is the excess of accelerated depreciation over straight-line depreciation. Here, the additional depreciation is $150,000 and the gain is $300,000, so $150,000 is ordinary income. The remaining $150,000 is section 1231 gain and, because there are no other section 1231 transactions, it is treated as long-term capital gain. Choice B applies the section 1245 rule, recapturing all depreciation, to real property. Choice C ignores the section 1250 recapture and also misstates the scope of the statute. Choice D ignores the ordinary-income recapture portion of the gain.