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CFP - Taxation of Property Flashcards

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
A loss resulting from WORTHLESS SECURITIES is treated how for tax purposes?
Deductible in the year in which the securities become worthless *Date of sale will equal 12/31 on the year they became worthless
26
Net capital losses of individuals are deductible for AGI to the extent of $_____
$3,000 Excess carried over indefinitely
27
Under IRC Sec 1244, a single taxpayer can deduct up to $_____ of the loss on small business stock as ______ loss in any given year.
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.
28
Section 267 disallows losses from exchanges of property between
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
1250 governs what?
The recapture of depreciation on REAL Section 1231 assets (as opposed to personalty)
30
Nonrecognition (nontaxable) Transactions include:
-"Realized" but not "Recognized" income -Like-kind exchanges -Principal residence -Investment real estate -Life insurance policies
31
If property is exchanged for like-kind property, no gain or loss is recognized if the property is held for either:
-Use in a trade or business OR -As an investment
32
Taxable gain in a like-kind exchange is always the lower of :
the boot received OR Any accounting gain
33
Section 1033 permits
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
Section 1035 provides for tax free exchanges of some
insurance policies* -a life insurance contract on the same individual -an endowment or annuity contract
35
Section 1031 only applies to ____ and no longer applies to _____
Section 1031 only applies to REAL PROPERTY and no longer applies to EQUIPMENT.
36
Estimated payments are necessary if the taxpayer expects
to owe at least $1,000 Must pay 90% of 2023 OR 100% of prior year
37
Distributions from Traditional IRAs are generally taxed as
Ordinary income
38
Distributions from IRAs/401ks before the age of 59 1/2 are subject to:
A 10% penalty
39
Below market loans have ____ interest and is ____ in taxable income
Below market loans have imputed interest and is included in taxable income
40
Below-market rate loans by a corporation to a shareholder in that corporation are treated as a
dividend to shareholder. As the shareholder makes loans payments, it is treated as interest income to the corporation.
41
Below market loans from an employer to an employee are treated as
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
Items specifically excluded from income:
-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
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
reasonably expected to die in 24 months 2/6 ADLs unable to perform
44
Although scholarships are not taxable, amount for _______ are taxable
Room and board are taxable to the recipient
45
Sale of personal residence deceased spouse how long can surviving spouse use $500,000 gain exclusion?
As long as the sale occurs no later than 2 years after the date of death of the deceased spouse
46
Qualified Roth IRA distribution reasons
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
Punitive damages are / are not included income
Included unless wrongful death
48
Damages for EMOTIONAL DISTRESS are / are not included income
INCLUDED IN TAXABLE INCOME
49
The costs of meals and lodging are/are not included in the employee's gross income if they are provided by employer?
ARE NOT INCLUDED
50
Up to $_____ of dependent care costs provided by employer may be excluded
$5,000
51
Athletic facilities
excluded
52
Excludable adoption assistance amount
limited to $15,950 (subject to phase out)
53
Are employee moves excluded from income?
Qualified moving expense reimbursements may NO LONGER BE EXCLUDED from an employee's gross income as a fringe benefit (exception: military order move)
54
Foreign earned income exclusion
$120,000 for 2023
55
Above the Line Deductions for AGI
-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
above the line deductions for self-employed
-certain education -business gifts $25 or less -No deductions for entertainment, 50% for meals -home office
57
Deductions from AGI (itemized deductions)
-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
Charitable contributions from IRAs characteristics
Must be made directly Donor must be 70 1/2 Can't > $100,000/yr
59
Secure Act RMDs
2019: 72 and eliminated age limit on contributions 2022: 73
60
Deductibility of Personal Interest expense is limited to
Investment interest expense is limited to investment interest income
61
Qualified personal residence interest deductibility limited to
up to $750,000 of mortgage indebtedness NO home equity interest
62
Child tax credit amount for 2023 Refundable?
$2,000 per qualifying child (includes step and foster children) Up to $1600 refundable
63
Child and dependent care credit
20% x eligible costs Up to $3000 (1 dependent) $6000 (2 dependents)
64
AOTC
100% of first 2000 25% of next 2000 MAX $2500 per student first four years refundable up to $1000
65
LLC
20% of $10000 Max $2000 Phaseout Can't double up with AOTC Not refundable
66
Kiddie tax
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
Deductions lost under AMT
State and local taxes Itemized deductions subject to 2%
68
Preference items that can throw someone into AMT
1. Percentage depletion 2. Intangible drilling costs 3. Interest on private activity bonds

CFP Exam (23 decks)

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