ch.

7 practice problems

7-44.
owns 5000 shares
- adjusted basis = 27500
then SOLD 5000 shares
- received cash = 10000
- received land = (valued at) 20000
- adjusted basis (to the buyer) = 12000

gain (loss) on sale of stock = (10000 + 20000) - 27500 ~ 2500 ---> gain
- adjusted basis of land received is NOT included in the calculation
above as the value of the land received is already included within
the value of the land

7-48.
capital asset: market value: tax basis: holding
period:
L stock $ 50000 $ 41000 > 1 yr. --->
long-term
M stock 28000 39000 > 1 yr. ---> long-
term
N stock 30000 22000 < 1 yr. --->
short-term
O stock 26000 33000 < 1 yr. --->
short-term
Antiques 7000 4000 > 1 yr. ---> long-term
Rental home 300000* 90000 > 1 yr. ---> long-
term

*$30000 accounts for 25% gain from accumulated depreciation

capital gain (loss) [market value - tax basis]:

L stock (LT) ---> 50000 - 41000 ~ 9000 gain
M stock (LT) ---> 28000 - 39000 ~ -11000 loss
N stock (ST) ---> 30000 - 22000 ~ 8000 gain
O stock (ST) ---> 26000 - 33000 ~ -7000 loss
Antiques (LT) ---> 7000 - 4000 ~ 3000 gain
Rental home (LT) ---> 300000 - 90000 ~ 210000 gain

a. gross tax liability =

mfj
ordinary income (OI) = 20000
- before considering tax effect on asset sales

short-term: long-term (28%): long-term (25%): long-term

(0/15/20%):
$ 8000 $ 3000 $ 30000 $ 9000
(7000)
(11000)
180000 <---
210000 gain - 30000 acc. dep.
= $ 1000 = $ 3000 = $ 30000 = $
178000

total ordinary income = 20000 + 1000 ~ 21000

- includes net short-term capital gain
 ordinary income = 21000
- tax liability = 1975 + [0.12 * (21000 - 19750)] ~ 2005

ordinary income w/ LT 25% gains = 21000 + 30000 ~ 51000

- taxed at 12% because the bracket rate (12%) < 25%
- tax liability = 30000 * 0.12 ~ 3600

ordinary income w/ LT 28% gains = 51000 +

if both short-term & long-term (28%/25%, etc.) buckets all end up positive,
no netting between buckets is necessary