9. Property Transactions: Basis & Dispositions Flashcards
What is cost basis?
The sum of capitalized acquisition costs.
Substituted basis is computed by
Reference to basis in other property
How is transferred basis computed?
Transferred basis is computed by reference to basis in the same property in the hands of another.
How is exchanged basis computed?
Exchanged basis is computed by reference to basis in other property previously held by the person.
What is converted basis?
Converted basis is when personal-use property is converted to business use.
*The basis of the property is the lower of its basis or the FMV on the date of conversion.
What costs are included in the initial basis of purchased property?
Initial basis in purchased property is the cost of acquiring it. Only capital costs are included, i.e., those for acquisition, title acquisition, and major improvements.
Are the costs of maintaining and operating property added to basis?
No, they are expensed.
Are the costs for the construction of real or tangible personal property to be used in a trade or business capitalized?
Yes. All costs necessary to prepare the property for its intended use are capitalized, including both direct and most allocable indirect costs, e.g., for permits, materials, equipment rent, compensation for services (minus any work opportunity credit), and architect fees.
Are the costs for the construction of real or tangible personal property to be used in a trade or business capitalized?
Yes. All costs necessary to prepare the property for its intended use are capitalized, including both direct and most allocable indirect costs, e.g., for permits, materials, equipment rent, compensation for services (minus any work opportunity credit), and architect fees.
How is cost basis determined?
Cost basis includes the FMV of property given up. If this amount is not determinable with reasonable certainty, the cost basis is the FMV of property received.
Is a rebate to the purchaser included in cost basis?
No, a rebate to the purchaser is treated as a reduction of the purchase price. It is not included in basis or in gross income.
How do liabilities to which the acquired property is subject affect the basis of that property?
Acquisition basis is increased for liabilities to which the acquired property is subject.
The FMV of property received in exchange for services is treated as what to the provider of those services?
The FMV of property received in exchange for services is income (compensation) to the provider when it is not subject to a substantial risk of forfeiture and not restricted as to transfer.
What is the tax cost basis of property received in exchange for services?
The property acquired has a tax cost basis equal to the FMV of the property.
To what extent is the sale of restricted stock to an employee treated as gross income (bonus compensation)?
Sale of restricted stock to an employee is treated as gross income (bonus compensation) to the extent any price paid is less than the stock’s FMV.
When more than one asset is purchased for a lump sum, how is the basis of each asset computed?
When more than one asset is purchased for a lump sum, the basis of each is computed by apportioning the total cost based on the relative FMV of each asset.
What is a donee’s basis in property acquired by gift if the FMV on the date of the gift is more than the donor’s basis?
The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation.
Are the costs and losses associated with demolishing a structure allocated to the land or to the structure?
Costs and losses associated with demolishing a structure are allocated to the land. The costs include the remaining basis (not FMV) of the structure and demolition costs.
What is the amount of 2022 annual exclusion for gift tax?
The 2022 annual exclusion for gift tax is $16,000.
If the FMV on the date of a gift is less than the donor’s basis, the donee has a dual basis for the property. What basis is used if the property is later transferred at a loss?
The FMV on the date of the gift is used if the property is later transferred at a loss.
If the FMV on the date of a gift is less than the donor’s basis, the donee has a dual basis for the property. What basis is used if the property is later transferred at a gain?
The donor’s basis is used if the property is later transferred at a gain.
If the FMV on the date of a gift is less than the donor’s basis, the donee has a dual basis for the property. What amount of gain or loss is recognized if the property is later transferred for more than the FMV but less than the donor’s basis on the date of the gift?
No gain or loss is recognized.
If gift property is later converted from personal to business use, what is the adjusted basis of the property on the date of conversion?
The adjusted basis is the lower of the transferor’s adjusted basis or the FMV on the date of conversion.
If property is received for services, what amount is included in gross income?
Gross income is the fair market value of the property received minus any cash or other property given.
If property is received for services, what should the amount of basis in the property be?
The basis in property received is the amount included in income plus any cash or other property given.
For property received for services, what amount should be included in an employee’s gross income?
Gross income of an employee includes any amount paid by an employer for a liability (including taxes) or an expense of the employee.
What is the basis of inherited property?
Basis is the FMV on the date of death.
What is the basis of inherited property if an executor elects the alternate valuation date?
If the executor elects the alternate valuation date, the basis of the assets is the FMV 6 months after the decedent’s death.
What is the basis of assets sold or distributed within the first 6 months after death?
If assets are sold or distributed within the first 6 months after death, basis equals FMV on the sale or distribution date.
The FMV basis rule applies to what types of property?
1.One-half of community property interests
2.Property acquired by form of ownership except if consideration was paid to acquire the property from a nonspouse
3.Property received prior to death without full and adequate consideration (if a life estate was retained in it) or subject to a right of revocation
How much gain or loss will a corporation generally recognize on transactions involving its own stock?
A corporation recognizes no gain or loss on transactions involving its own stock.
If a distribution of stock is subject to tax, what amount of the distribution is taxed?
The amount of the distribution subject to tax is the FMV of distributed stock or stock rights.
Is a stock split a taxable distribution?
No, a stock split is not a taxable distribution.
After a stock split, how is the basis in the shares calculated?
*The basis of the old stock is divided by the number of new shares.
*The holding period of the new stock includes that of the old stock.
Will basis be increased or decreased for expenditures that substantially prolong the life of property by at least 1 year or materially increase its value?
Basis will be increased.
What effect does depreciation have on the basis of business property?
Depreciation taken on business property will decrease the basis.
By what amount of depreciation must basis be reduced?
Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed).
Does a shareholder recognize gain on the voluntary contribution of capital to a corporation?
No, there is no gain recognized on the voluntary contribution of capital.
What effect does the voluntary contribution of capital have on the shareholder’s stock basis?
The shareholder’s basis is increased by the basis in the contributed property.
How are distributions out of earnings and profits taxed?
They are taxable as dividends.
Does the receipt of dividends reduce a shareholder’s stock basis?
No. Since dividends are taxable, they do not reduce basis.
How are distributions that are not out of earnings and profits taxed?
They are treated as a nontaxable return of capital until basis is reduced to zero.
Distributions in excess of basis are treated as
Capital gains.
How is basis affected by casualty losses?
Basis is reduced by the amount of the casualty loss allowed as a deduction and by any amounts recovered by insurance.
How does the partial disposition of property affect basis?
The basis of the whole property must be equitably apportioned among the parts; relative FMV is generally used.
What is the basis for depreciation for property that is converted from personal use to business use?
The lesser of the FMV of the property at the conversion date or the adjusted basis at conversion.
Do lessors generally report income when a lessee makes leasehold improvements?
No, lessors do not generally report income when a lessee makes leasehold improvements or when leasehold improvements revert to the lessor at the termination of the lease.
What is the lessor’s basis in leasehold improvements?
Generally, the lessor’s basis is zero.
How is the holding period of an asset measured?
The holding period of an asset is measured in calendar months, beginning on the date after acquisition and including the disposal date.
A property held for 1 year or less is considered to be
Short-term.
A property held for more than 1 year is considered to be
Long-term.
The types of property that are not characterized as capital assets include
1.Inventory (or stock-in-trade)
2.Real or depreciable property used in a trade or business
3.Accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or sale of inventory
4.Copyrights and artistic compositions held by the person who composed them, including letters
5.Certain U.S. government publications acquired at reduced cost
Is property classified as dealer property characterized as a capital asset?
Property held either for personal use or for the production of income is a capital asset, but dealer property is not.
Furnishings, automobiles, stocks, bonds, land, and contract rights are examples of
Capital assets.
Works of art, antiques, gems, stamps, and coins are examples of
Collectibles.
When is goodwill a capital asset?
Goodwill is a capital asset when it is generated within the business.
What kind of asset is goodwill when it is acquired with the purchase of a trade or business?
Goodwill acquired with the purchase of a trade or business is an amortizable intangible asset.
When are stocks, bonds, commodities, and the like not considered capital assets?
They are not considered capital assets when they are dealer property.
Under Sec. 1001, when are all gains (losses) generally realized?
Under Sec. 1001, all gains (losses) are realized on the “sale or other disposition of property.”
What is the difference between a sale and an exchange?
*A sale is a transfer of property in exchange for money or a promise to pay money.
*An exchange is a transfer of property in return for other properties or services.
What is the difference between a sale and an exchange?
*A sale is a transfer of property in exchange for money or a promise to pay money.
*An exchange is a transfer of property in return for other properties or services.
On what date is the sale or exchange of real property deemed to have occurred?
For real property, a sale or exchange occurs on the earlier of the date of conveyance or the date that the burdens of ownership pass to the buyer.
Do all realized gains need to be recognized?
Yes, unless the IRC expressly provides otherwise.
What is the difference between a long-term capital gain or loss (LTCG or LTCL) and a short-term capital gain or loss (STCG or STCL)?
A LTCG or LTCL is realized from a capital asset held for more than 1 year. A STCG or STCL is realized if the asset was held 1 year or less.
What is net capital gain (NCG)?
NCG is the excess of net long-term capital gain over net short-term capital loss (net LTCG – net STCL). Net short-term capital gain is not included in NCG.
In what order can a net long-term capital loss carryover offset net gain?
A carryover of a net long-term capital loss from a prior year is used first to offset any net gain in the 28% basket, then to offset any net gain in the 25% basket, and finally to offset any net gain in the 15% basket.
A corporation’s capital gains (short- and long-term) are taxed at what rate?
For corporations, all capital gains (ST or LT) are taxed at the corporation’s regular tax rate.
If an individual does not have net capital gains, how much net capital loss may that individual recognize?
If the individual does not have net capital gains, (s)he recognizes a net capital loss in the current year up to the lesser of $3,000 ($1,500 for married filing separately) or ordinary income.
How long may an individual carry forward excess (unused) capital losses?
An individual may carry forward any excess capital losses indefinitely.
How must a corporation carry excess capital losses?
A corporation must carry the excess capital loss back 3 years and forward 5 years and characterize all carryovers as STCLs (regardless of character).
What is Schedule D used for?
Schedule D (Form 1040) is used to compute and summarize total capital gains and/or losses on the sale or disposition of capital assets listed on Form 8949, and the summary combines the long-term gains (losses) with the short-term gains (losses).
A return of capital distribution reduces basis and becomes a capital gain when
The shareholder’s basis in the stock reaches zero.
How are undistributed capital gains earned in a mutual fund taxed?
As capital gains in the current period, and a credit is allowed for any tax paid by the mutual fund on behalf of the taxpayer.
What is the 60/40 rule?
Positions in regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options in an exchange using the mark-to-market system are treated as if they were sold on the last day of the year. Any capital gains or losses arising under this rule are treated as if they were 60% long-term and 40% short-term without regard to the holding period.
What amount of the gain from the sale or exchange of qualified small business stock may be excluded?
Taxpayers may exclude 50% of the gain from the sale or exchange of qualified business stock if issued after August 10, 1993, and held for more than 5 years (75% if acquired after February 17, 2009, and before September 28, 2010; 100% if acquired after September 27, 2010).
Qualified small business stock must be that of a domestic C corporation with aggregate gross assets not exceeding what amount?
Qualified small business stock must be that of a domestic C corporation with aggregate gross assets not exceeding $50 million.
In order to be a qualified small business, a corporation must have at least what percentage of its assets, by value, used in the active conduct of a qualified business?
The corporation must have at least 80%, by value, of its assets used in the active conduct of a qualified business.
A qualified small business is any business other than
1.The performance of personal services (e.g., banking, financing, and leasing);
2.Any farming business;
3.Any extractive industry; and
4.Hospitality businesses (e.g., hotels and restaurants).
The aggregate annual gain for which a taxpayer may qualify under Sec. 1202 is limited to
The greater of $10 million or 10 times the adjusted tax basis of qualified stock disposed of by the taxpayer during the year.
Individuals are allowed to roll over capital gains from the sale of Sec. 1202 stock if other small business stock is purchased within how many days after the date of sale?
Individuals are allowed to roll over capital gains from the sale of Sec. 1202 stock if other small business stock is purchased within 60 days after the date of sale.
Is the loss from the sale, exchange, or worthlessness of “small business stock” (Sec. 1244 stock) issued by a qualifying small business corporation deductible?
Yes, an individual may deduct, as an ordinary loss, a loss from the sale, exchange, or worthlessness of “small business stock” (Sec. 1244 stock) issued by a qualifying small business corporation.
What is maximum amount of loss deductible from the sale, exchange, or worthlessness of “small business stock” (Sec. 1244 stock) issued by a qualifying small business corporation?
The maximum amount deductible as an ordinary loss in any year is $50,000 ($100,000 on a joint return).
