P2-U09 · PART 2 · SOURCE CYCLE 2026-2027
Disposition of Business Assets
How to complete this unit
This unit uses 16 source-gated recall cards and 21 admissible practice questions. Complete the sequence in order; the unreleased wiki prose remains outside the learner path.
- 1 · LearnBuild the rule
Answer each recall prompt before opening it. Then learn the exact rule, test the controlling facts through four quick challenges, explore common questions, and finish with one own-words teach-back.
- 2 · ApplyUse it in context
Complete at least 20 mapped questions over two sessions. Review the explanation even when the answer is correct.
- 3 · ProveTest readiness
Use the Part 2 mock under time pressure. Return here for every flagged or missed concept before the next attempt.
Verified recall questions
Only cards whose complete question and answer were checked against exact primary-authority evidence appear here. Stable unit ownership gathers this lesson across 1 textbook collection.
Q1.Alder holds goods primarily for sale to customers in the ordinary course of business. How are they classified for the cited disposition rule?
As noncapital assets
Q2.Alder transfers depreciable business property for $20,000 with a $10,000 adjusted basis. The resulting $10,000 taxable gain is depreciation recapture. How is it reported?
As ordinary income from depreciation
Q3.Alder makes a qualifying installment sale. When may gain generally be reported?
As payments or payment-equivalent debt relief are received
Q4.For a qualifying like-kind analysis, how may exchanged properties differ while remaining like kind?
They may differ in grade or quality but must be of the same nature or character
Q5.Robstown Ranch, LLC purchased an industrial harvester for $100,000 many years ago. The harvester eventually breaks down over many years of use, and the business sells the used harvester for scrap in 2025 for $7,000. Robstown Ranch had depreciated the asset down to $10,000, its remaining basis. It sold no other business property in the preceding five years. What is the gain or loss on this equipment?
$3,000 ordinary loss
Q6.On January 10, 2025, an office building owned by Pagoda Manufacturing burns down. The property had an adjusted basis of $190,000, and Pagoda Manufacturing receives an insurance reimbursement of $340,000. Pagoda Manufacturing buys another office property for $295,000 on November 8, 2025. What is the company's reportable gain as a result of this transaction?
$45,000
Q7.Which of the following is not section 1245 property?
Office building.
Q8.Which of the following property types qualifies for section 1031 like-kind exchange?
Undeveloped land held for investment.
Q9.Turley Accountancy, LLP exchanges an office building with an adjusted basis of $125,000 for a strip mall building. The fair market value of the office building is $519,000. The fair market value of the strip mall is $525,000. Turley Accountancy pays an additional $4,000 to the seller to complete the exchange. After the exchange is completed, what is Turley Accountancy's basis in the strip mall?
$129,000
Q10.Jennifer operates Wavy Hair Salon, a sole proprietorship. In 2025, she sells all of her old salon chairs for $3,500 in order to buy new ones. She had purchased the chairs seven years ago for $15,000, and they were fully depreciated. Therefore, her basis in the chairs is zero at the time of the sale. How should she report this transaction?
She reports a gain of $3,500 on Form 4797. The entire $3,500 is treated as depreciation recapture, which is subject to ordinary income tax rates.
Q11.Silas operates an auto salvage yard as a sole proprietorship. During the year, Silas sold heavy equipment that was used in the business for $100,000. The original cost of the equipment was $120,000, and Silas had claimed depreciation deductions totaling $47,000. Based on the information provided, what is the nature and amount of taxable income that will result from the sale of the equipment?
Ordinary income of $27,000.
Q12.Eastwood Auto Painting, LLC, which is taxed as a partnership, does custom auto painting. The business owns a classic automobile, which was originally purchased for $20,000. It uses the automobile exclusively in its showroom to display its paint designs to potential customers. The car is only used as a showpiece and is not considered inventory. The automobile had been depreciated by $12,000, so the partnership's adjusted basis in it was $8,000 in 2025. A local museum asks to purchase the car in 2025, and Eastwood Auto Painting agrees to the sale, selling the car to the museum for $25,000. What is the nature of the tax treatment resulting from this sale?
Ordinary income of $12,000 and a Section 1231 gain of $5,000.
Q13.Deluxe Airlines, Inc. is a private jet charter service. In the prior year (2024), Deluxe Airlines sold a used jet at a $50,000 loss. The jet was used in business operations for several years, so it was a section 1231 business asset. In 2025, Deluxe Airlines sold another used jet and had a $90,000 section 1231 gain. Applying the 5-year lookback rule, how much of the gain from the sale in 2025 would be classified as ordinary, and how much would be capital gain?
$50,000 of the gain would be ordinary, and $40,000 would be long-term capital gain.
Q14.Sadie owns a small fitness gym as a sole proprietor. She sells some used fitness machines during the year for $65,000. She had purchased the equipment for $90,000 several years ago. She has taken $50,000 of depreciation deductions, and a section 179 deduction of $10,000. How should Sadie report the sale of these business assets?
Ordinary income of $35,000.
Q15.Sergio owns several residential rental properties. He is not a real estate professional. He trades a condo in Mississippi (adjusted basis $30,000, FMV $50,000) for a duplex in Nevada (FMV $75,000). The Nevada duplex is more valuable than the Mississippi property, so Sergio has to pay an additional $19,000 cash to the seller in order to close the sale. This is a qualified 1031 exchange. What is Sergio's basis in the Nevada duplex after the exchange?
$49,000
Q16.Tabitha and Tanner are siblings who complete a section 1031 exchange on January 21, 2025, properly exchanging two residential rentals. On June 29, 2025, Tabitha dies, and her rental property is inherited by her husband, who sells it a month later. Tabitha's husband will file a joint return with his late wife Tabitha, in 2025, the year of her death. Which of the following statements is correct?
This section 1031 exchange is still valid for both parties in the exchange.
Ready to move on?
- ▸ Explain at least 80% of these 16 rules without opening the answer, twice on different days.
- ▸ Score 80% across 20 or more mapped questions over two sessions, not one memorized round.
- ▸ Complete a timed Part 2 mock and return to this unit if its concepts remain flagged or missed.
Use these checks to choose your next study action. They do not predict a PSI scaled score.