3.3 - Gains & Losses Flashcards
When a taxpayer disposes of property, the gain or loss recognized is classified as either:
Capital or ordinary
Capital assets include property (real and personal) held by the taxpayer such as:
Personal automobile
Furniture and fixtures in the taxpayer’s home
Stocks and securities
Personal property not used in a trade or business
Real property not used in a trade or business
Copyrights, literary, musical, or artistic compositions that have been PURCHASED
What is the basic formula to calculate gain or loss?
Amount realized - adjusted basis of asset sold = gain or loss
The amount realized includes:
Cash received (boot/loot)
Assumption of debt by buyer (debt relief)
FMV of property received
FMV of services received
SUBTRACT OUT selling expenses
A taxpayer conveys commercial property in which the taxpayer has a basis of $70,000 and which is subject to a mortgage of $45,000 to another party for $60,000 in cash. Determine the amount realized on the sale and the gain or loss realized.
45,000 mortgage releived + 60,000 cash received = 105,000 amount realized
105,000 - 70,000 basis = 35,000 realized gain
What is the holing period and tax rates for long term property for individual tax payers?
Holding period = more than 1 year
Tax rate = dependent on the taxpayer’s taxable income and filing status (either 0%, 15%, or 20%)
What is the holding period and tax rate for short term property for individual tax payers?
Holding period = less than 1 year
Tax rate = treated as ordinary income
Any unrecognized section 1250 gain from depreciation of real property (for individuals) that is not treated as ordinary income is taxed how?
At a maximum rate of 25%
Any long term gains on the sale of collectibles and section 1202 qualified small business stock (for individuals) is taxed how?
At a maximum rate of 28%
What are the net capital loss deduction and loss carryover rules for individual taxpayers?
There is maximum $3,000 deduction per year
Any excess over that $3,000 deduction is carried forward forever until exhausted
How are personal bad debts and worthless stock securities treated for individual taxpayers?
Bad debt = as a short term capital loss in the year the debt becomes worthless
Stock & securities = as a capital loss in the year they become worthless
What do short sales result in? What is the holding period?
Result in a capital gain or loss
Holding period is based on the date the short sale is executed (NOT the closing date)
What is the netting process for individuals?
Gains and losses are netted within each tax rate group and taxed as the following:
Short term ordinary tax rate group
Long term 0/15/20% tax group
Long term 25% tax rate group
Long term 28% tax rate group
How are net capital gains treated/taxed for C Corporations?
There is no distinction between short term and long term capital gains and losses for C corporations. Gains are added to ordinary income and taxed at the regular tax rate.
How are net capital losses treated/taxed for C Corporations?
Net capital losses may not be deducted from ordinary income. Losses are carried back 3 years and forward 5.
Offset income or gains? Excess carry back? Excess carry forward?
Net operating losses
Individual capital losses
Corporate capital losses
NOL = Yes (80% limit) ; No ; Indefinitely
ICL = $3,000 limit ; No ; Indefinitely
CCL = No ; 3 years ; 5 years
What assets are classified as a long-term trade or business use section 1231 asset?
Assets that are used in the taxpayers trade or business and held for more than 12 months
If a taxpayer’s combined 1231 gains and losses for the year result in a net 1231 los, how is the loss treated?
Treated as ordinary income
If a taxpayers combined 1231 gains and losses for the year result in a net 1231 gain, how is the gain treated?
Treated as a long term capital gain
C-Corps can use the capital gains to offset capital losses
Individuals capital gains are taxed at 0/15/20%
If the taxpayer has a section 1231 gain for the year, what must the taxpayer first do before recording anything?
“Look back” to see if the were any net section 1231 losses deducted as ordinary losses during the previous 5 years and pay it back.
A C Corporation purchased land that is used in its business for $100,000 in year 1. The corporation sold the land in year 7 for $150,000. The corporation had prior unrecaptured net section 1231 loss in year 3 of $30,000. The corporation had no other 1231 gains or losses in year 7 and no other prior net 1231 gains or losses. Calculate the amount and character of the gain recognized.
150,000 selling price - 100,000 cost = 50,000 gain
30,000 ordinary income (to cover the prior years loss)
20,000 long-term capital gain
Section 1231 assets include what their type of assets?
Section 1245 depreciable personal property, section 1250 depreciable real property, and land
What assets are included under the section 1245 assets?
Depreciable personal property used in a trade or business for more than 12 month (vehicles, computes, machinery, equipment)
How are gains for section 1245 assets treated?
The lesser of the gain recognized or accumulated depreciation is recaptured as ordinary income and any remaining gain is a section 1245 gain
A c corporation owned equipment used in its business with an original cost basis of $100,000 and accumulated depreciation of $30,000. The corporation sold the equipment after 2 years for $95,000. Calculate the amount and character of the gain recognized on the sale.
100,000 - 30,000 = 70,000 adjusted basis
95,000 - 70,000 = 25,000 gain
25,000 < 30,000; therefore gain recognized = 25,000
What assets are included under the section 1250 assets?
Depreciable real property used in a trade or business for more than 12 months (warehouse, office building but NOT LAND)
For C corporations, under section 291 under section 1250 assets, how are gains treated?
The amount of recaptured as ordinary income is equal to 20% of the lesser of the recognized Ian or the accumulated straight line depreciation. Any excess is a section 1231 gain.
Section 291 only applies to c corporations
For individuals, under the section 1250 assets, how are gains treated?
Part or all of the gain may be taxed at the section 12500 gain rate of 25% (max)
A c corporation owned a building used in its business with an original cost basis of $100,000 and straight line accumulated depreciation of $15,000. The corporation sold the building for $95,000. Calculate the amount and character of the gain recognized on the sale of the building.
100,000 cost - 15,000 depreciation = 85,000 adjusted basis
95,000 selling price - 85,000 = 10,000 gain
10,000 gain X 20% (section 291 tax rate) = 2,000 ordinary income
10,000 - 2,000 = 8,000 1231 gain
A sole proprietorship (individual) owned a building with an original cost basis of $100,000 and straight line accumulated depreciation of $15,000. The corporation sold the building for $95,000. Calculate the amount and character of the gain recognized on the sale of the building.
100,000 - 15,000 = 85,000
95,000 - 85,000 = 10,000 1231 gain recognized
10,000 X 25% = 2,500 1250 taxed gain
Robert’s printing inc. sold the following assets during the year:
Printing press - sold for $4,000. Accum. Depr. = 3,200. Adjusted basis = 3,600.
Photocopier - sold for $2,600. Accum. Depr. = 500. Adjusted basis = 2,000.
Delivery van - sold for $500. Accum. Depr. = 13,000. Adjusted basis = 2,000.
Calculate the gain or loss recognizes. Calculate the depreciation recapture. Determine the character f any remaining gain or loss.
- 4,000 - 3,600 = 400 gain recognized
2,600 - 2,000 = 600 gain recognized
500 - 2,000 = 1,500 loss recognized - Printing press & photocopier are 1245 assets so the depreciation recapture =
400 gain < 3,200 depreciation; therefore 400 ordinary income
600 gain > 500 depreciation; therefore 500 ordinary income
3.
100 remaining 1231 gain from photocopier - 1,500 loss from van = 1,400 net 1231 loss that is deducted as ordinary income
What are the simple rules of thumb for section 1245 personal property depreciation recapture?
Section 1231 loss = treated as ordinary loss
Ordinary income =gain to the extent of accumulated depreciation and net 1231 gain to the extend of unrecaptured net 1231 losses in previous 5 years
Capital gain = net section 1245 gain after depreciation recapture and 5 year look back
What is the tax method of reporting gains (not losses) for sales made by a “non merchant” in personal property and “non dealer” in real estate when part of the payments are received in a tax year after the year of the sale?
Installment sale method
What is the formula used to calculate the installment sale gain/income?
- Sales price - adjusted basis = gross profit
- Gross profit / sales price = gross profit percentage
- Cash collections (excluding interest) X gross profit percentage = gain recognized (taxable income)
Under the installment method, when is gain recognized?
When cash is received even if accrual basis financial statements
A taxpayer had $400,000 in installment sales in year 1 and a December 31, year 1 balance in installment notes receivable of $150,000. The taxpayer had $300,000 as its adjusted basis. Calculate the gross profit, the gross profit percentage, and the gain recognized in year 1 under the installment method.
Gross profit = 400,000 - 300,000 = 100,000
Gross profit percentage = 100,000 / 400,000 = 25%
Gain recognized = 25% X (400,000 - 150,000) = 62,500
