Solutions to Chapter 7 Problem Assignments

Check Your Understanding
3. Realized vs. Recognized Gain Explain the difference between a realized gain and a recognized gain. Solution: A realized gain is the excess of the amount realized on a sale or exchange over the adjusted basis of the property sold or exchanged. The recognized gain is the amount of this realized gain that will be treated as income and subject to tax on the seller’s income tax return.

4. Asset Classification What type of assets are Section 1231 assets? What type of assets are capital assets? What type of assets are ordinary income assets? Give several examples of each type of asset. Solution: The most common Section 1231 assets are depreciable realty and personalty used in a trade or business and nondepreciable trade or business realty that have been held for more than one year. Long-term capital gain property held for the production of income that is involuntarily converted is also Section 1231 property. To qualify, all of these assets must have been held for more than one year. Section 1231 assets include machinery and equipment, office furniture and fixtures, rental real estate, factory buildings and land held for future expansion of a business. Capital assets include most investment properties and personal-use assets. They exclude inventory, real and depreciable property used in a trade or business, and accounts and notes receivable from the sale of inventory in the ordinary course of business. Capital assets include investment stocks and bonds and other investment property, personal residences, and personal property items such as furs, jewelry, autos, and clothing. Ordinary assets include inventory, stock in trade, and accounts and notes receivable from inventory sales in the ordinary course of business. In addition, any asset that cannot be