Acquisition and Disposal of assets

Question 1

Basis of a gift

Answer 1

1. If FMV is greater than donor’s basis, then recipients basis is donor’s basis.
   -if this is the case, basis is increased by part of any gift tax pd by donor. To determine increase:
   (gift tx pd) x [(FMV of gift - donor’s basis) / (FMV - annual exclusion)] = gift tax due to net increase in value of gift
2. If FMV is less than donor’s basis, then basis is determined at time of sale by recipient.
   - if gain at time of sale, then use donor’s basis
   - if loss at time of sale, then use FMV
   - if sales price is in-between the two, then it’s zero (no gain or loss)

Question 2

Recording installment sale

Answer 2

1. Find Gross Profit %
   (Sales price - Basis) / Sales Price
2. Calculate the basis in an installment
   (Unpaid balance x Gross Profit %) - Unpaid Balance
3. If installment sale is sold before paid off, calculate gain(loss) by
   Sales price - Current Basis

Question 3

1231 and 1245 recapture rules

Answer 3

Any property (besides depr real prop) that has taken depr/amort is subject to 1245 recapture first, and must recognize that amount as Ordinary income.

Then any remaining gain would be 1231 gain, which is normally capital gains. But if there’s any 1231 losses from the prior 5 yrs, then a portion of the c/y gains will be recaptured at ordinary income (up to the amount of p/y 1231 losses) then the remaining will be capital gain.

Question 4

Related party rules for like kind exchanges

Answer 4

• Taxpayer and certain immediate family and lineal ancestors/descendants
• Taxpayer and a corporation if they directly or indirectly own MORE than 50%
• Taxpayer and partnership if they directly or indirectly own MORE than 50%
• Taxpayer and tax-exempt charity or education org controlled by taxpayer or family

Question 5

Tax treatment as Ordinary Gain on sale or exchange of depreciable property between which type of related parties?

Answer 5

Directly or indirectly by one of the following:

1. A person and their 51% or more controlled entity (corps, prtnrshps)
2. A taxpayer and their trust if they’re the beneficiary
3. Executor and beneficiary of estate (unless pecuniary bequest (bequest for a sum of money))
4. An employer and a welfare benefit fund

Question 6

Rules on 1244 Qualified small-business stock

C corp stock, issued after 8/10/93, total gross assets $50M or less

Answer 6

If 1244 stock is sold as a loss or becomes worthless you can deduct loss as Ordinary Loss (on Form 4797) up to 50K for single or 100K for married, then the rest is deducted as capital loss

If 1244 stock is sold at a gain and has held the stock for at least 5 yrs they can exclude the following amounts per date purchased:
1. If bought before Feb 17, 2009 - exclude 50%
2. If bought between Feb 18, 2009 & Sep 26, 2010 - exclude 75%
3. If bought after Sep 27, 2010 - exclude 100%
The gain excluded is limited to the GREATER of:
-10 times the taxpayers basis in the stock
or
-$10 million gain from the stock

Question 7

Wash sales

Answer 7

• If stock is sold and the repurchased within 30 days of sale, then it is a wash sale and no loss is allowed and the disallowed amount is added to the stock basis of the new repurchased stock.
• Stock sold and bought by related parties falls under wash sale rules (this includes married filing separate couples)

Question 8

Non-business bad debts

Answer 8

Written off in year they are deemed worthless and ALWAYS as S/T capital losses.

Deduction can be taken in year it was realized or on an Amended return within 7 yrs after the year it should have been taken.

If a taxpayers non-business bad debt is cancelled, then they have to include that amount in ordinary income.