Oregon Tax Consultants Practice Exam

What is the effect of selling personal property for less than its basis?

1. Taxable gain

2. Potentially deductible loss

3. No financial impact

4. Additional taxes owed

The correct answer is: Potentially deductible loss

When personal property is sold for less than its basis, a potentially deductible loss is recognized. The basis represents the original value of the property, and selling it for a lower amount indicates a loss on the investment. This loss can often be used to offset other taxable gains in the taxpayer's financial situation, providing a tax benefit. In the context of tax implications, this deduction can reduce the overall taxable income, leading to potential tax savings for the individual or business. The key factor is that the sale is indeed below the basis, which confirms that financial loss is realized. In contrast, the other options do not accurately describe the situation: taxable gain would apply if the property were sold for more than its basis, having no financial impact does not acknowledge the realization of the loss, and additional taxes owed would imply a gain rather than a loss. Thus, recognizing a loss when selling personal property for less than its basis is crucial for proper tax reporting and planning.