10. Biz Property, Installment Sales

Question 1

How is gain recognized on the sale of an asset when an asset is transferred to a related person in whose hands the asset is depreciable?

Answer 1

Gain recognized on the sale of an asset is ordinary income when an asset is transferred to a related person in whose hands the asset is depreciable.

Question 2

Regarding related party sales, “related” means

Answer 2

1.A person and the person’s controlled entity(ies),
2.A taxpayer and any trust in which the taxpayer (or spouse) is a beneficiary,
3.An executor and a beneficiary of an estate, and
4.An employer and a welfare benefit fund controlled directly or indirectly by the employer (or related person).

Question 3

Is the loss realized on the sale or exchange of property to a related person recognized?

Answer 3

No, this type of loss is not recognized.

Question 4

If loss is realized on the sale or exchange of property to a related person, and gain is realized on a subsequent sale to an unrelated party, how much of the gain realized should be recognized?

Answer 4

Gain realized on a subsequent sale to an unrelated party is recognized only to the extent it exceeds the previously disallowed loss.

Question 5

If loss is realized on the sale or exchange of property to a related person, and additional loss is realized on a subsequent sale to an unrelated party, how much of the loss realized should be recognized?

Answer 5

Loss realized on a subsequent sale to a third party is recognized, but the previously disallowed loss is not added to it.

Question 6

What are tax-indifferent parties?

Answer 6

Tax-indifferent parties are those not subject to federal income tax or to whom an item would have no substantial impact on its income tax. Examples of tax-indifferent parties include non-U.S. persons, tax-exempt organizations, and government entities.

Question 7

** test**
Related parties under Sec. 267(b) and (c) generally include

Answer 7

1.Ancestors, lineal descendants, spouses, and siblings (nephews, nieces, step-relatives are not descendants)
.Trusts and beneficiaries of trusts
3.Controlled entities (greater than 50% ownership)

Question 8

Related parties under Sec. 267(b) and (c) generally include

Answer 8

1.Ancestors, lineal descendants, spouses, and siblings (nephews and nieces are not descendants)
.Trusts and beneficiaries of trusts
3.Controlled entities (greater than 50% ownership)

Question 9

Is an employee a related party to the employer for the purposes of the related-party sale rules?

Answer 9

No, an employee is not a related party to the employer for purposes of the related-party sale rules.

Question 10

When an employer sells assets to an employee at less than FMV, what is the difference between the FMV and the sales price considered to be to the employee?

Answer 10

The difference between FMV and the sales price is considered compensation to the employee.

Question 11

When an employer sells assets to an employee at less than FMV, what is the employee’s basis in the new property?

Answer 11

Because the employee pays tax on the compensation, his or her basis in the new property will be FMV.

Question 12

Is a gain or loss recognized on the transfer of property between spouses?

Answer 12

No, gain or loss is recognized on the transfer of property between spouses or, incident to a divorce, on transfers of property to a former spouse.

Question 13

What amount of realized gain on the disposition of Sec. 1245 property is ordinary income?

Answer 13

A recognized gain on the disposition of Sec. 1245 property is ordinary income to the extent of all depreciation or amortization taken or gain realized.

Question 14

When is property considered placed in service?

Answer 14

Property is considered placed in service when it is ready and available for a specific use.

Question 15

What is Sec. 1245 property?

Answer 15

Section 1245 property generally is depreciable personal property used in a trade or business for over 12 months. It is
1.Tangible (intangible), depreciable (amortizable) personal property;
2.Recovery property, including specified real property; and
3.Tax benefit property.

Question 16

What is Sec. 1245 property?

Answer 16

Section 1245 property generally is depreciable personal property used in a trade or business for over 12 months. It is
1.Tangible (intangible), depreciable (amortizable) personal property;
2.Recovery property, including specified real property; and
3.Tax benefit property.

Question 17

Some examples of intangible Sec. 1245 property include

Answer 17

1.Leaseholds of Sec. 1245 property
2.Professional athletic contracts, e.g., major league baseball
3.Patents
4.Livestock
5.Goodwill acquired in connection with the acquisition of a trade or business
6.Covenants not to compete

Question 18

What is Sec. 1250 property?

Answer 18

Section 1250 property is all depreciable real property, held for more than 1 year, such as a building or its structural components.

Question 19

What amount of gain realized on the sale or disposition of Sec. 1250 property is ordinary income?

Answer 19

The lesser of the gain recognized or the excess of accelerated depreciation taken over S-L depreciation is ordinary income.

Question 20

When Sec. 1231 property gains exceed losses, each gain or loss is treated as

Answer 20

Being from the sale of a long-term capital asset.

Question 21

If Sec. 1231 property losses exceed gains, what is each gain or loss considered?

Answer 21

If Sec. 1231 property losses exceed gains (a net Sec. 1231 loss), each gain or loss is considered ordinary.

Question 22

What kind of property is Sec. 1231 property?

Answer 22

Property that is held for more than 1 year and includes
1.All real or depreciable property used in a trade or business or
2.Involuntarily converted capital assets held in connection with a trade or business or in a transaction entered into for a profit.

Question 23

What kind of property is Sec. 1231 property?

Answer 23

Property that is held for more than 1 year and includes
1.All real or depreciable property used in a trade or business or
2.Involuntarily converted capital assets held in connection with a trade or business or in a transaction entered into for a profit.

Question 24

Is inventory Sec. 1231 property?

Answer 24

No, inventory is not Sec. 1231 property.

Question 25

Examples of Sec. 1231 property include

Answer 25

*Apartment buildings,
*Parking lots,
*Manufacturing equipment,
*Involuntarily converted investment artwork, and
*Land (pure Sec. 1231 property).

Question 26

Section 1231 has a two-step test. What is the first step?

Answer 26

Determine net gain or loss from all casualties or thefts of Sec. 1231 property for the tax year (does not include involuntary conversions by other than casualty or theft).
1.If the result is a net loss, each gain or loss is treated as ordinary income or loss.
2.If the result is a net gain, each gain or loss in included in Step 2.

Question 27

Section 1231 has a two-step test. What is the first step?

Answer 27

Determine net gain or loss from all casualties or thefts of Sec. 1231 property for the tax year (does not include involuntary conversions by other than casualty or theft).
1.If the result is a net loss, each gain or loss is treated as ordinary income or loss.
2.If the result is a net gain, each gain or loss in included in Step 2.

Question 28

Section 1231 has a two-step test. What is the second step?

Answer 28

Determine net gain or loss from all dispositions of Sec. 1231 property for the year, including the property included in Step 1 only if Step 1 resulted in a net gain.
1.If the result is a net loss, each gain or loss is treated as ordinary income or loss.
2.If the result is a net gain, each gain or loss is treated as a long-term capital gain or loss, subject to the Sec. 1231 recapture rules.

Question 29

Is allocation required when Sec. 1245 or Sec. 1250 property is also Sec. 1231 property?

Answer 29

Yes, but only when a portion of gain recognized is Sec. 1245 or Sec. 1250 ordinary income.

Question 30

What amount of net gain on Sec. 1231 property is treated as ordinary income?

Answer 30

Net gain on Sec. 1231 property is treated as ordinary income to the extent of unrecaptured net Sec. 1231 losses from the preceding 5 tax years.

Question 31

What are unrecaptured net Sec. 1231 losses?

Answer 31

Unrecaptured net Sec. 1231 losses are the total of net Sec. 1231 losses for the last 5 tax years, reduced by net Sec. 1231 gains characterized as ordinary income under Sec. 1231(c).

Question 32

Does Sec. 1245 or Sec. 1250 apply to gift dispositions?

Answer 32

No, neither apply to gift dispositions.

Question 33

Do Sec. 1245 and Sec. 1250 generally apply to dispositions by bequest, devise, or intestate succession?

Answer 33

No, neither apply to these situations.

Question 34

Is gain recognized on the exchange of property for the stock of a newly formed corporation?

Answer 34

Generally, no gain is recognized upon an exchange of property for all the stock of a newly formed corporation.

Question 35

Must the installment method be used to report all installment sales?

Answer 35

No, an election can be made not to apply the method.

Question 36

What is an installment sale?

Answer 36

An installment sale is a disposition of property in which at least one payment is to be received after the close of the tax year in which the disposition occurs.

Question 37

Installment sales do not apply to certain dispositions, including

Answer 37

1.Inventory personal property sales
2.Revolving credit personal property sales
3.Dealer dispositions
4.Securities, generally, if publicly traded
5.Sales on agreement to establish an irrevocable escrow account

Question 38

What amount of gain realized on installment sales must be recognized?

Answer 38

The amount of realized gain to be recognized in a tax year is equal to the gross profit multiplied by the ratio of payments received in the current year divided by the total contract price. Recognize, as income, payments received multiplied by the gross profit percentage.

Question 39

For installment sales, what is the gross profit percentage?

Answer 39

The ratio of the gross profit to the total contract price.

Question 40

For installment sales, what is gross profit?

Answer 40

The sales price reduced by any selling expenses and adjusted basis.

Question 41

What is the anti-avoidance rule as it relates to an installment sale of property to a related party?

Answer 41

On a second disposition (by the related party transferee in the first sale), payments received must be treated as a payment received by the person who made the first (installment) sale to a related party.

Question 42

What amount of income is recognized on the disposition of installment obligations?

Answer 42

Excess of the FMV over the adjusted basis (AB) of an installment obligation is generally recognized as income if it is transferred.

Question 43

How is gain recognized on the sale of an asset when an asset is transferred to a related person in whose hands the asset is depreciable?

Answer 43

Gain recognized on the sale of an asset is ordinary income when an asset is transferred to a related person in whose hands the asset is depreciable.

Question 44

Regarding related party sales, “related” means

Answer 44

1.A person and the person’s controlled entity(ies),
2.A taxpayer and any trust in which the taxpayer (or spouse) is a beneficiary,
3.An executor and a beneficiary of an estate, and
4.An employer and a welfare benefit fund controlled directly or indirectly by the employer (or related person).