Area 3 Flashcards
What are the different types of Assets?
Ordinary income assets - Assests acquired or produced with the intention of being sold in the ordinary course of business.
1231 - Non-Current assets held for more than 12 months used in the course of business. Sale or Disposal is incidental to the business.
Capital Assets - Investments & non-business assets. Everything that’s not an Ordinary Income Asset or a 1231 asset.
How are 1031 (Like-Kind) Exchanges treated?
If no boot is involved, no gain or loss is recognized. Basis is carried over from the original asset.
If boot is involved, the gain recognized is the lesser of the Realized gain or the boot received.
- If two parties exchange property, the mortgage (if any) on the property is considered boot.
Section 179 Depreciation
Take the deduction up to the lesser of the net income for the year or 1,050,000 and carry over or bonus depreciation for the rest. Top out at 2,625,000
1031 Exchange
According to Section 1031, any gain realized from a qualified like-kind exchange can be tax-deferred and recognized only when the replacement property is ultimately sold. As per the new Tax Cut and Jobs Act of 2017 Section 1031 no longer applies to personal property and only applies to the exchanges of real property.
Exception - Boot Received
Mortgage counts as boot.
Gain Recognized is the lesser of the boot received or the realized gain.
Depreciation Recapture
On a sale of depreciable personal property, the ordinary income under Section 1245 generally is equal to the lesser of (1) the total gain realized or (2) the accumulated depreciation. Section 1231(a)(3)(A) treats any remaining gain as a Section 1231 gain, which is not ordinary income under Section 64
How are losses on the sale of personal residence treated for an individual?
They are not deductible
MACRS 5 year vs 7 year
MACRS divides personal property into six classes. The 5-year class includes automobiles, light trucks, and computers. The 7-year class includes office furniture and office equipment.
How are Devalued gifts treated?
If devalued property is acquired by gift, then the basis to the donee is determined at the time of disposal. When devalued gifted property is disposed of in a taxable transaction at a price between the fair market value at the date of the gift and the adjusted basis of the property in the hands of the donor, and the fair market value of the property at the date of the gift was less than the adjusted basis to the donor, then no gain or loss is recognized on the disposition.
Section 1221 Capital Assets
What are Capital Assets?
Section 1221 defines capital assets as property held by the taxpayer, except for a number of items listed. Investments in stock or bonds are capital assets. Section 1221(4) excludes accounts receivable from the sale of inventory from being treated as capital assets. Section 1221 excludes depreciable property used in a business and excludes inventory or property held primarily for sale to customers in the ordinary course of business from the definition of capital assets.
Property not used in the course of business. No Patents.
Can be investments or real estate as long as its not used in the course of business.
Personal Residence is included in capital assets.
Gift Tax Exclusions
$15,000 ($30,000 for MFJ) for present interest gift to a single individual. No exclusion for future interest gifts
Gifts to Spouse are excluded completely. Expenses to support minors
Non Gifts:
Charitable Contributions
Political Contributions
Payments directly to school for tuition for benefit of another
Payments directly to healthcare providers for benefit of another
Wash Sale Rules
Wash Sale Occurs if a purchase of the same stock is made within 30 days of the original sale of the stock.
The Loss on the original sale is decreased by the amount of shares repurchased. ** If the original Sale was 500 shares but they repurchased 250, treat the sale as if it were 250 shares. The disallowed loss is then added to the basis of the stock repurchased.
Original - Sold 500
Repurchased within 30 days -250
Total recognized loss - 250 shares
Basis of new stock purchased - 250 at repurchase price + the 250 share unallowed loss.
Mom and pop exception
Allows a 25,000 deduction of passive activity losses when AGI is below 100,000
If the actively participate in the activity
Phases out for everything above 100k
Maximum Ordinary Loss allowed Section 1244
The Maximum ordinary loss allowed for Section 1244 is 50,000 for an individual. The rest is treated as capital loss.
Capital Asset vs 1231 Property vs ordinary income assets
Capital assets are non-business assets that are held for investment and/or personal use. The sale of a capital asset results in a capital gain or loss. Everything other than 1231 & Ordinary income assets
Real and Personal property used in trade or business held longer than one year is considered 1231 property. Can be land or buildings
-1231 is split between 1245 and 150.
Ordinary income assets- current assets of a business i.e. assets acquired or produced with the intention of being sold in the ordinary course of business.
Gifts vs Inheritance
In general
Gifts - Carryover basis
Inheritance - FMV
