Multiple Choice
In the dividend discount model (DDM), the value of a stock is primarily determined by which of the following?
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7. Receivables and Investments
Introduction to Investments in Securities
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When do unrecaptured Section 1250 gains apply in the context of investments in securities?
A
When intangible assets such as patents are sold at a gain.
B
When depreciable real property is sold at a gain and the gain is attributable to depreciation previously taken.
C
When bonds are sold at a loss and the loss is due to market fluctuations.
D
When stocks are sold at a gain after being held for more than one year.
Verified step by step guidance1
Understand the concept of Section 1250 gains: Section 1250 gains apply to depreciable real property, such as buildings, that have been sold at a gain. These gains are specifically tied to the depreciation previously claimed on the property.
Recognize the term 'unrecaptured Section 1250 gains': This refers to the portion of the gain on the sale of depreciable real property that is attributable to depreciation deductions taken during the ownership period. These gains are taxed at a maximum rate of 25%, which is different from the typical capital gains tax rates.
Identify the context of the problem: The question is asking about scenarios where unrecaptured Section 1250 gains apply. The correct scenario involves the sale of depreciable real property at a gain, where the gain is due to depreciation previously taken.
Eliminate incorrect options: Review the other options provided in the problem. Gains from intangible assets like patents, losses from bonds due to market fluctuations, and gains from stocks held for more than one year do not involve depreciable real property or depreciation deductions, so they are not relevant to Section 1250 gains.
Conclude the correct application: Unrecaptured Section 1250 gains specifically apply when depreciable real property is sold at a gain, and the gain is attributable to depreciation previously taken. This is the correct answer based on the context of the problem.
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