4 Cap Gains, Deprec, & 1031s Flashcards
What property is a capital asset?
Everything except what is NOT a capital asset:
- Accounts or notes receivable acquired in the ordinary course of a trade or business for services.
- Copyrights; a literary, musical, or artistic composition; a letter, memo, or similar property created by the taxpayer.
- Inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
- Depreciable property used in trade or business (e.g., Section 1231 assets).
When is a capital gain short-term vs long-term?
short-term: held ≤ 12 months
long-term: held > 12 months
Average Cost Method
Average cost method when an investor sells a portion (but not all) of their position in a particular asset, the cost basis is determined by averaging all their purchases.
Used by mutual fund custodians
How are collectibles taxed?
- held ≤ 1year: ordinary income
- held > 1 year: 28%™
What is default IRS method of determining cost basis (in case of multiple lots)?
FIFO
Max capital loss per year applied to ordinary income? how long can carry it forward?
Filing S, HOH, MFJ: $3K
Filling MFS: $1.5K
Can carry loss forward indefinitely.
Section 1231 Property
- what is it?
- how are gains, losses, and recaptured depreciation taxed?
It’s property that’s both:
- (a) held for a trade or business, and
- (b) held for the production of income
Taxed:
- Gains: taxed as capital gains
- Losses: taxed as ordinary losses
- Recaptured gains: taxed at ord income for personalty (1245) and 25%™ for realty (IRC Section 1250 depreciation recapture™)
Section 1245 Property
- what is it?
- how are gains, losses, and recaptured depreciation taxed?
- personalty used in a trade/biz to produce income
- gains: taxed as cap gains
- losses: taxed as ord losses
- recaptured depreciation: taxed as ordinary income
Section 1250 Property
- what is it?
- how are gains, losses, and recaptured depreciation taxed?
- realty used in a trade/biz to produce income
- gains: taxed as cap gains
- losses: taxed as ord losses
- recaptured depreciation: taxed at special unrecaptured gain rate of 25%™
How is a sale of depreciated property taxed?
- if a loss?
- if recapturing depreciation?
- if a gain?
Loss beneath adjusted basis -> ordinary loss
Depreciation recaptured taxed at:
(a) ordinary if 1245 (personalty)
(b) 25% if 1250 (realty)
Any gains after deprec. recapture taxed as Section 1231 cap gains at cap gains rates.
gain if sale & ordinary if loss = best of both worlds
Deadlines for a 1031 exchange?
After the transfer of the relinquished property, you have…
- …45 days to identify potential replacements
- … lesser of (a) 180 days or (b) when tax return including extensions is due to complete the exchange & receive the replacement property
Calculations of a 1031 exchange
1. Amount Realized
2. Realized Gain
3. Recognized Gain
4. Deferred Gain
5. Substituted Basis
- Amount Realized = Replacement Prop. FMV + Net Boot
- Realized Gain = Amount Realized – Relinquished Basis
- Recognized Gain = min(Realized Gain, Net Boot Received) [basically net boot up to ceiling of realized gain]
- Deferred Gain = Realized Gain – Recognized Gain
- Substituted Basis = Repalcement Prop. FMV – Deferred Gain
All Real Recognition Defies Substitutes
What property qualifies for 1031 exchanges?
Section 1231 Real Estate (Realty) used for Business or Investment Purposes (basically section 1250 property)
