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CFP Exam > CFP - Taxation of Property > Flashcards

CFP - Taxation of Property Flashcards

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1
Q

Business Assets - Section 1231

What is it?

How long must it be held for?

Gains are treated as?

Losses are treated as?

What may apply?

A

Depreciable and Real Property USED IN A TRADE OR BUSINESS

How long must it be held for? GREATER THAN 1 YEAR

Gains are treated as? CAPITAL GAINS

Losses are treated as? ORDINARY LOSSES

What may apply? DEPRECIATION RECAPTURE

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2
Q

What does Section 1245 cover?

A

Depreciable Business Personalty (non-real-estate)

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3
Q

How does Section 1245 (non-real estate) handle gains?

A

Gains are ordinary income to the extent of depreciation allowed

Gains above original purchase price are treated as Section 1231

If loss = ordinary loss

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4
Q

Section 1250 - Depreciable Business Realty

A

1st Gains are ORDINARY INCOME to the extent of accelerated depreciation taken

2nd Gains are to the extent of S/L DEPRECIATION taken are taxed at 25%

3rd Any additional gain is taxed at Capital Gains rate

Sold at LOSS = ORDINARY LOSS

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5
Q

Adjusted basis includes

A

Cost +

Capital Additions (beyond repairs) -

Capital Recoveries (depreciation, casualty/theft losses)

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6
Q

What is included in Cost Basis?

A

Purchase Price +
FMV of any prop given in taxable exchange +
Sales tax +
Freight +
Installation +
Legal & Acctg Fees +
Real Estate taxes +
Recording fees +
Testing

***Don’t forget to include sales tax if not provided

***Mortgages are included in cost basis (obligation to pay)

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7
Q

SPECIAL BASIS RULES: Inheritance

Basis?

Holding Period?

A

The basis is FMV at date of death

Holding period is ALWAYS LONG-TERM

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8
Q

SPECIAL BASIS RULES: Property Received as a Gift

Basis?

A

Basis? CARRYOVER BASIS, SAME AS DONEE

Holding period TACK ON TO HOLDING PD OF DONEE

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9
Q

Is land depreciated?

A

NO, therefore it is not section 1231

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10
Q

3 YEAR PROPRTY

A

Tractors

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11
Q

5 year property

A

Autos, taxis, buses, trucks

Computer, printer, fax

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12
Q

7 year property

A

Office furniture & fixtures

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13
Q

27.5 year property

A

Residential and rental property

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14
Q

39 year property

A

Nonresidential real property

(Section 1250 property such as office building or store or warehouse)

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15
Q

CAT CORN for depreciation classes

A

CAT 5 yr (cars, auto, trucks) - 1245 recapture
O 7 yr (office furniture & fixtures) - 1245 recapture
R 27.5 yr (residential real prop) - 1250 recapture
N 39 yr (non-residential real prop) - 1250 recapture

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16
Q

Is depreciable property Section 1231 or a capital asset?

A

Section 1231

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17
Q

What is not considered a capital asset?

A

ACID

Inventory
Depreciable property used in a trade or business
Copyrights and creative works
Accounts and notes receivable

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18
Q

All assets are capital assets except ACID. What does ACID stand for?

A

Accounts/notes receivable
Copyrights and creative works
Inventory
Depreciable property

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19
Q

Transfers of property between spouse due to divorce are treated the same as

A

gifts

(carryover basis applies)

No gain or loss is recognized on a transfer between spouses (within 1 year of divorce)

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20
Q

Related Party transactions:

How are losses handled?

How are gains handled?

Holding period?

A

FMV for losses

Transferor’s basis for gains

HOLDING PERIOD is ALWAYS the date of sale

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21
Q

How to calculate amount realized with the sale of property?

A

Cash received +

FMV of property received in exchange +

Liabilities shed

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22
Q

Examples of situations where the gain or loss may be REALIZED but NOT RECOGNIZED:

A

-Like-kind exchange of real property

-Cash received is quickly reinvested in a similar property

-Transfer of property to a controlled corporation

-Exchange of plans of corporate reorg

-Transfer to/distributions from, partnerships

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23
Q

When an asset is used for PERSONAL PURPOSES, any loss incurred during the period of personal use is considered ______

A

a PERSONAL LOSS, and is not permitted as a tax deduction

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24
Q

Sale of a PERSONAL RESIDENCE revenue recognition rules:

A

-If a taxpayer realizes a loss, that loss may NOT be recognized

-single taxpayers may exclude up to $250,000 of gain from the sale of their principal residence*

-married taxpayers may exclude up to $500,000 of gain from the sale of their principal residence*

*must have lived in the property for at least 2 out of the last 5 years

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25
Q

A loss resulting from WORTHLESS SECURITIES is treated how for tax purposes?

A

Deductible in the year in which the securities become worthless

*Date of sale will equal 12/31 on the year they became worthless

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26
Q

Net capital losses of individuals are deductible for AGI to the extent of $_____

A

$3,000

Excess carried over indefinitely

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27
Q

Under IRC Sec 1244, a single taxpayer can deduct up to $_____ of the loss on small business stock as ______ loss in any given year.

A

Under IRC Sec 1244, a single taxpayer can deduct up to $50,000 of the loss on small business stock as ORDINARY loss in any given year.

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28
Q

Section 267 disallows losses from exchanges of property between

A

related parties*

Siblings
Children/Grandchildren
Parents/Grandparents
Spouse

NEVER gift or sell an asset to a related party when the donor’s basis greater than the FMV of the asset!

29
Q

1250 governs what?

A

The recapture of depreciation on REAL Section 1231 assets (as opposed to personalty)

30
Q

Nonrecognition (nontaxable) Transactions include:

A

-“Realized” but not “Recognized” income

-Like-kind exchanges

-Principal residence

-Investment real estate

-Life insurance policies

31
Q

If property is exchanged for like-kind property, no gain or loss is recognized if the property is held for either:

A

-Use in a trade or business
OR
-As an investment

32
Q

Taxable gain in a like-kind exchange is always the lower of :

A

the boot received

OR

Any accounting gain

33
Q

Section 1033 permits

A

nontaxable treatment of gains if the amount of reinvestment in replacement property equals or exceeds the amount realized.

Period ends 2 years from end of year that gain is realized
Or 3 years for condemnation

34
Q

Section 1035 provides for tax free exchanges of some

A

insurance policies*

-a life insurance contract on the same individual
-an endowment or annuity contract

35
Q

Section 1031 only applies to ____ and no longer applies to _____

A

Section 1031 only applies to REAL PROPERTY and no longer applies to EQUIPMENT.

36
Q

Estimated payments are necessary if the taxpayer expects

A

to owe at least $1,000

Must pay 90% of 2023
OR
100% of prior year

37
Q

Distributions from Traditional IRAs are generally taxed as

A

Ordinary income

38
Q

Distributions from IRAs/401ks before the age of 59 1/2 are subject to:

A

A 10% penalty

39
Q

Below market loans have ____ interest and is ____ in taxable income

A

Below market loans have imputed interest and is included in taxable income

40
Q

Below-market rate loans by a corporation to a shareholder in that corporation are treated as a

A

dividend to shareholder.

As the shareholder makes loans payments, it is treated as interest income to the corporation.

41
Q

Below market loans from an employer to an employee are treated as

A

paid compensation for the employee and are subject to employment taxes

As the employee makes loans payments, it is treated as interest income to the employer.

42
Q

Items specifically excluded from income:

A

-Gifts and Inheritances
-Life Insurance
-Scholarships
-Gain on sale of personal residence
-Qualified distribution from Roth IRA
-Compensation for injuries and sickness
-Employer sponsored accident and health plans
-Child support

43
Q

The IRC defines a “terminally ill” person in terms of a viatical settlement as

The IRC defines a “chronically ill” person in terms of a viatical settlement as

A

reasonably expected to die in 24 months

2/6 ADLs unable to perform

44
Q

Although scholarships are not taxable, amount for _______ are taxable

A

Room and board are taxable to the recipient

45
Q

Sale of personal residence

deceased spouse

how long can surviving spouse use $500,000 gain exclusion?

A

As long as the sale occurs no later than 2 years after the date of death of the deceased spouse

46
Q

Qualified Roth IRA distribution reasons

A

Held for at least 5 years AND:

-First-time home purchase

-Disability

-Death

-On/after age 59 1/2

*** Roth 401k can’t be used for home purchase

47
Q

Punitive damages are / are not included income

A

Included unless wrongful death

48
Q

Damages for EMOTIONAL DISTRESS are / are not included income

A

INCLUDED IN TAXABLE INCOME

49
Q

The costs of meals and lodging are/are not included in the employee’s gross income if they are provided by employer?

A

ARE NOT INCLUDED

50
Q

Up to $_____ of dependent care costs provided by employer may be excluded

A

$5,000

51
Q

Athletic facilities

A

excluded

52
Q

Excludable adoption assistance amount

A

limited to $15,950 (subject to phase out)

53
Q

Are employee moves excluded from income?

A

Qualified moving expense reimbursements may NO LONGER BE EXCLUDED from an employee’s gross income as a fringe benefit

(exception: military order move)

54
Q

Foreign earned income exclusion

A

$120,000 for 2023

55
Q

Above the Line Deductions for AGI

A

-Trade or business expenses
-Loss on sale or exchange of property
-Deductions from rental and royalty property
-Alimony prior to 12/31/2018
-1/2 SE tax
-SE health insurance premiums
-Contributions to pension, annuity, IRA, etc
-Penalty on premature withdrawal from savings
-Interest on student loans
-HSAs
-Teacher expense deduction

56
Q

above the line deductions for self-employed

A

-certain education
-business gifts $25 or less
-No deductions for entertainment, 50% for meals
-home office

57
Q

Deductions from AGI (itemized deductions)

A

-Medical (excess of 7.5% AGI)
-SALT (capped at $10,000)
-Charitable (can’t exceed 50% AGI) (cash 60% AGI)
-Casualty losses (if declared national disaster)
-QBI

58
Q

Charitable contributions from IRAs characteristics

A

Must be made directly
Donor must be 70 1/2
Can’t > $100,000/yr

59
Q

Secure Act RMDs

A

2019: 72 and eliminated age limit on contributions
2022: 73

60
Q

Deductibility of Personal Interest expense is limited to

A

Investment interest expense is limited to investment interest income

61
Q

Qualified personal residence interest deductibility limited to

A

up to $750,000 of mortgage indebtedness

NO home equity interest

62
Q

Child tax credit amount for 2023

Refundable?

A

$2,000 per qualifying child (includes step and foster children)

Up to $1600 refundable

63
Q

Child and dependent care credit

A

20% x eligible costs

Up to $3000 (1 dependent)
$6000 (2 dependents)

64
Q

AOTC

A

100% of first 2000
25% of next 2000

MAX $2500

per student

first four years

refundable up to $1000

65
Q

LLC

A

20% of $10000

Max $2000

Phaseout

Can’t double up with AOTC

Not refundable

66
Q

Kiddie tax

A

Greater of $1250 unearned OR $400 + earned
Only applies to unearned income in excess of $2,500

Standard deduction of $1250 for unearned income

Second 1250 taxed at child’s marginal rate

Excess at parent’s rate

67
Q

Deductions lost under AMT

A

State and local taxes

Itemized deductions subject to 2%

68
Q

Preference items that can throw someone into AMT

A
  1. Percentage depletion
  2. Intangible drilling costs
  3. Interest on private activity bonds

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