9. Property Transactions: Basis & Dispositions

Question 1

What is cost basis?

Answer 1

The sum of capitalized acquisition costs.

Question 2

Substituted basis is computed by

Answer 2

Reference to basis in other property

Question 3

How is transferred basis computed?

Answer 3

Transferred basis is computed by reference to basis in the same property in the hands of another.

Question 4

How is exchanged basis computed?

Answer 4

Exchanged basis is computed by reference to basis in other property previously held by the person.

Question 5

What is converted basis?

Answer 5

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.

Question 6

What costs are included in the initial basis of purchased property?

Answer 6

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.

Question 7

Are the costs of maintaining and operating property added to basis?

Answer 7

No, they are expensed.

Question 8

Are the costs for the construction of real or tangible personal property to be used in a trade or business capitalized?

Answer 8

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.

Question 9

Are the costs for the construction of real or tangible personal property to be used in a trade or business capitalized?

Answer 9

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.

Question 10

How is cost basis determined?

Answer 10

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.

Question 11

Is a rebate to the purchaser included in cost basis?

Answer 11

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.

Question 12

How do liabilities to which the acquired property is subject affect the basis of that property?

Answer 12

Acquisition basis is increased for liabilities to which the acquired property is subject.

Question 13

The FMV of property received in exchange for services is treated as what to the provider of those services?

Answer 13

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.

Question 14

What is the tax cost basis of property received in exchange for services?

Answer 14

The property acquired has a tax cost basis equal to the FMV of the property.

Question 15

To what extent is the sale of restricted stock to an employee treated as gross income (bonus compensation)?

Answer 15

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.

Question 16

When more than one asset is purchased for a lump sum, how is the basis of each asset computed?

Answer 16

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.

Question 16

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?

Answer 16

The donee’s basis in property acquired by gift is the donor’s basis, increased for any gift tax paid attributable to appreciation.

Question 16

Are the costs and losses associated with demolishing a structure allocated to the land or to the structure?

Answer 16

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.

Question 16

What is the amount of 2022 annual exclusion for gift tax?

Answer 16

The 2022 annual exclusion for gift tax is $16,000.

Question 17

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?

Answer 17

The FMV on the date of the gift is used if the property is later transferred at a loss.

Question 18

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?

Answer 18

The donor’s basis is used if the property is later transferred at a gain.

Question 19

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?

Answer 19

No gain or loss is recognized.

Question 20

If gift property is later converted from personal to business use, what is the adjusted basis of the property on the date of conversion?

Answer 20

The adjusted basis is the lower of the transferor’s adjusted basis or the FMV on the date of conversion.

Question 21

If property is received for services, what amount is included in gross income?

Answer 21

Gross income is the fair market value of the property received minus any cash or other property given.

Question 22

If property is received for services, what should the amount of basis in the property be?

Answer 22

The basis in property received is the amount included in income plus any cash or other property given.

Question 23

For property received for services, what amount should be included in an employee’s gross income?

Answer 23

Gross income of an employee includes any amount paid by an employer for a liability (including taxes) or an expense of the employee.

Question 24

What is the basis of inherited property?

Answer 24

Basis is the FMV on the date of death.

Question 25

What is the basis of inherited property if an executor elects the alternate valuation date?

Answer 25

If the executor elects the alternate valuation date, the basis of the assets is the FMV 6 months after the decedent’s death.

Question 26

What is the basis of assets sold or distributed within the first 6 months after death?

Answer 26

If assets are sold or distributed within the first 6 months after death, basis equals FMV on the sale or distribution date.

Question 27

The FMV basis rule applies to what types of property?

Answer 27

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

Question 28

How much gain or loss will a corporation generally recognize on transactions involving its own stock?

Answer 28

A corporation recognizes no gain or loss on transactions involving its own stock.

Question 29

If a distribution of stock is subject to tax, what amount of the distribution is taxed?

Answer 29

The amount of the distribution subject to tax is the FMV of distributed stock or stock rights.

Question 30

Is a stock split a taxable distribution?

Answer 30

No, a stock split is not a taxable distribution.

Question 31

After a stock split, how is the basis in the shares calculated?

Answer 31

*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.

Question 32

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?

Answer 32

Basis will be increased.

Question 33

What effect does depreciation have on the basis of business property?

Answer 33

Depreciation taken on business property will decrease the basis.

Question 34

By what amount of depreciation must basis be reduced?

Answer 34

Basis must be reduced by the larger of the amount of depreciation allowed or allowable (even if not claimed).

Question 35

Does a shareholder recognize gain on the voluntary contribution of capital to a corporation?

Answer 35

No, there is no gain recognized on the voluntary contribution of capital.

Question 36

What effect does the voluntary contribution of capital have on the shareholder’s stock basis?

Answer 36

The shareholder’s basis is increased by the basis in the contributed property.

Question 37

How are distributions out of earnings and profits taxed?

Answer 37

They are taxable as dividends.

Question 38

Does the receipt of dividends reduce a shareholder’s stock basis?

Answer 38

No. Since dividends are taxable, they do not reduce basis.

Question 39

How are distributions that are not out of earnings and profits taxed?

Answer 39

They are treated as a nontaxable return of capital until basis is reduced to zero.

Question 40

Distributions in excess of basis are treated as

Answer 40

Capital gains.

Question 41

How is basis affected by casualty losses?

Answer 41

Basis is reduced by the amount of the casualty loss allowed as a deduction and by any amounts recovered by insurance.

Question 42

How does the partial disposition of property affect basis?

Answer 42

The basis of the whole property must be equitably apportioned among the parts; relative FMV is generally used.

Question 43

What is the basis for depreciation for property that is converted from personal use to business use?

Answer 43

The lesser of the FMV of the property at the conversion date or the adjusted basis at conversion.

Question 44

Do lessors generally report income when a lessee makes leasehold improvements?

Answer 44

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.

Question 45

What is the lessor’s basis in leasehold improvements?

Answer 45

Generally, the lessor’s basis is zero.

Question 46

How is the holding period of an asset measured?

Answer 46

The holding period of an asset is measured in calendar months, beginning on the date after acquisition and including the disposal date.

Question 47

A property held for 1 year or less is considered to be

Answer 47

Short-term.

Question 48

A property held for more than 1 year is considered to be

Answer 48

Long-term.

Question 49

The types of property that are not characterized as capital assets include

Answer 49

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

Question 50

Is property classified as dealer property characterized as a capital asset?

Answer 50

Property held either for personal use or for the production of income is a capital asset, but dealer property is not.

Question 51

Furnishings, automobiles, stocks, bonds, land, and contract rights are examples of

Answer 51

Capital assets.

Question 52

Works of art, antiques, gems, stamps, and coins are examples of

Answer 52

Collectibles.

Question 53

When is goodwill a capital asset?

Answer 53

Goodwill is a capital asset when it is generated within the business.

Question 54

What kind of asset is goodwill when it is acquired with the purchase of a trade or business?

Answer 54

Goodwill acquired with the purchase of a trade or business is an amortizable intangible asset.

Question 55

When are stocks, bonds, commodities, and the like not considered capital assets?

Answer 55

They are not considered capital assets when they are dealer property.

Question 56

Under Sec. 1001, when are all gains (losses) generally realized?

Answer 56

Under Sec. 1001, all gains (losses) are realized on the “sale or other disposition of property.”

Question 57

What is the difference between a sale and an exchange?

Answer 57

*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.

Question 58

What is the difference between a sale and an exchange?

Answer 58

*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.

Question 59

On what date is the sale or exchange of real property deemed to have occurred?

Answer 59

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.

Question 60

Do all realized gains need to be recognized?

Answer 60

Yes, unless the IRC expressly provides otherwise.

Question 61

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)?

Answer 61

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.

Question 62

What is net capital gain (NCG)?

Answer 62

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.

Question 63

In what order can a net long-term capital loss carryover offset net gain?

Answer 63

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.

Question 64

A corporation’s capital gains (short- and long-term) are taxed at what rate?

Answer 64

For corporations, all capital gains (ST or LT) are taxed at the corporation’s regular tax rate.

Question 65

If an individual does not have net capital gains, how much net capital loss may that individual recognize?

Answer 65

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.

Question 66

How long may an individual carry forward excess (unused) capital losses?

Answer 66

An individual may carry forward any excess capital losses indefinitely.

Question 67

How must a corporation carry excess capital losses?

Answer 67

A corporation must carry the excess capital loss back 3 years and forward 5 years and characterize all carryovers as STCLs (regardless of character).

Question 68

What is Schedule D used for?

Answer 68

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).

Question 69

A return of capital distribution reduces basis and becomes a capital gain when

Answer 69

The shareholder’s basis in the stock reaches zero.

Question 70

How are undistributed capital gains earned in a mutual fund taxed?

Answer 70

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.

Question 71

What is the 60/40 rule?

Answer 71

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.

Question 72

What amount of the gain from the sale or exchange of qualified small business stock may be excluded?

Answer 72

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).

Question 73

Qualified small business stock must be that of a domestic C corporation with aggregate gross assets not exceeding what amount?

Answer 73

Qualified small business stock must be that of a domestic C corporation with aggregate gross assets not exceeding $50 million.

Question 74

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?

Answer 74

The corporation must have at least 80%, by value, of its assets used in the active conduct of a qualified business.

Question 75

A qualified small business is any business other than

Answer 75

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).

Question 76

The aggregate annual gain for which a taxpayer may qualify under Sec. 1202 is limited to

Answer 76

The greater of $10 million or 10 times the adjusted tax basis of qualified stock disposed of by the taxpayer during the year.

Question 77

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?

Answer 77

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.

Question 78

Is the loss from the sale, exchange, or worthlessness of “small business stock” (Sec. 1244 stock) issued by a qualifying small business corporation deductible?

Answer 78

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.

Question 79

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?

Answer 79

The maximum amount deductible as an ordinary loss in any year is $50,000 ($100,000 on a joint return).