CH. 11 - Property Dispositions Flashcards
To calculate the amount of gain or loss taxpayers realize when they dispose of assets, they must determine ___________
the amount realized on the sale and the adjusted basis for each asset they are selling
What is the amount realized by a taxpayer from the sale or other disposition of an asset?
the value of everything received by the seller in a transaction (cash, FMV of other property, and relief of liabilities) less selling costs.
What is the amount realized computation?
Amount realized = cash received + FMV of other property + buyers assumptions of liability’s – seller’s expenses
How is a gift defined?
as a transfer of property proceeding from a detached and disinterested generosity or out of affection, respect, admiration, charity, or like impulses.
If the donor’s basis is greater than the FMV value of a gifted asset on the date of the gift, then __________ rules apply
special dual basis rules
A dual basis means that the gifted property has one basis to the donee if the donee sells the property at a price above the donor’s basis and a different basis if the donee sells the property at a price below the fair market value oat the date of the gift.
For inherited property, the general ruse is that the heir’s basis in property passing from a descendent to their heir is the ___________ on the date of the decedent’s death
FMV
True or false: the basis for determining the gain or loss on the sale of converted property (from personal use to business use) does not depend on whether the property appreciated or declined in value during the time the property was used personally.
False; it does
For property converted from personal use to business use that has appreciated, the taxpayer will use ____________ to calculate depreciation and gain or loss at disposition
their basis
The basis of gifted property that has declined in value depends on _____________
the sale price of the asset subsequent to the gift
For a donee to calculate basis of an asset on sale day, they use the ____________ if the asset is sold for a gain and ____________ if the asset is sold for a loss
carryover basis (aka the sale price is more than the donor’s basis)
FMV (sales price is less than FMV at the date of the sale)
If an asset sells at a price between the donor’s basis and the FMV at the date of the gift, the the donee’s basis at the time of the sale is _______________
equal to the selling price and the donee does not recognize a gain or loss in the sale
For gifted property (if the FMV value of the gift is of equal or greater value than the donor’s basis at the time of the gift) the general rule is that _________
the donor’s basis for the gifted property is carried over to the donee. The basis is increased by the amount of gift tax paid by the donor that is attributable to the increase in the property’s value.
In general, what will the donee’s basis be when the FMV of the gift at the time of the gift is less than the donor’s basis, and what is the name of the special rules that apply?
The donee’s basis depends on the future selling price of the property, and on whether the sale transaction results in a gain or a loss to the donee.
dual basis rules
(Circumstances: what will the donee’s basis be when the FMV of the gift at the time of the gift is less than the donor’s basis?)
-If the property is sold by the donee at a price lower than the property’s FMV at the time of the gift, the donee uses _________ as their basis
the FMV
(Circumstances: what will the donee’s basis be when the FMV of the gift at the time of the gift is less than the donor’s basis?)
-If the property is sold by the donee at a price higher than the donor’s basis, the donee uses the ______________ as their basis
the donee’s basis
True or false: the holding period of inherited property is deemed to be long term regardless of how long the heir owns the property
True!
For property converted from business use to personal use with a basis greater than value, ____________ apply
The dual basis
Adjusted basis
an asset’s carrying value for tax purposes at a given point in time, measured as the initial basis (for example, cost) plus capital improvements less depreciation or amortization. Also called adjusted tax basis.
What is the basic equation for adjusted basis?
Adjusted basis = initial basis - cost recovery allowed/allowable (aka deductions)
True or false: because businesses generally use more highly accelerated depreciation methods for tax purposes than they do for book purposes, the adjusted tax basis of a particular asset is likely to be higher than the adjusted book basis.
False; it is likely to be lower
What is the basic equation for realizing a gain or loss?
Gain/loss realized = amount realized - adjusted basis
A recognized gain or loss is
a realized gain or loss reported on the taxpayer’s current year return
Recognized gains or losses
gains or losses are gains or losses that increase or decrease a taxpayers gross income
Every gain or loss is characterized as either ______ or ________
ordinary or capital
Why is it important to define the character of a gain or loss for tax purposes?
Because gains or losses of different characters are treated differently for tax purposes
What are the key facts of characters of assets?
Ordinary assets:
-Assets created or used in a taxpayers trade or business
-Business assets held for one year or less
Capital Assets:
-Assets held for investment purposes
-Assets held for personal-use purposes
1231 Assets
-Depreciable assets and land used in a trade or business held for more than one year
Business assets held for one year or less are _________ assets; depreciable assets and land used in a trade or business held for more than one year are __________ assets
ordinary assets; 1231 assets
Ordinary asset
an asset created or used in a taxpayer’s trade or business (e.g., accounts receivable, machinery used for a year or less, inventory) that generates ordinary income (or loss) on disposition.
Capital asset
in general, an asset other than an asset used in a trade or business or an asset such as an account or note receivable acquired in a business from the sale of services or property.
Generally an asset held for investment for the production of income or for personal use.
Production of income
a for-profit activity that doesn’t rise to the level of a trade or business.
True or false: the same asset may be considered a capital asset to one taxpayer and an ordinary asset to another.
True! Whether the asset qualifies as a capital asset or as an ordinary asset depends on the purpose for which the taxpayer uses the asset.
Individual taxpayers generally prefer __________ (ordinary income/capital gains)
Capital gains, because certain capital gains are taxed at lower rates and capital gains may offset capital losses that cannot be deducted against ordinary income.
Individual taxpayers prefer __________ (ordinary losses/capital losses)
ordinary losses because they are deductible without limit, while individuals may only deduct $3,000 of net capital losses against ordinary income each year
Individuals may only deduct ______ of net capital losses against ordinary income each year
$3,000
Corporate taxpayers may prefer _________ (ordinary income/capital gains)
Capital gains because may offset capital losses that they would not be aallowed to offset otherwise.
True or false: C corporatations are allowed to deduct net capital losses
False – they are not
§1231 assets
depreciable or real property used in a taxpayer’s trade or business owned for more than one year.
Depreciation recapture
the conversion of §1231 gain into ordinary income on a sale (or exchange) based on the amount of accumulated depreciation on the property at the time of sale or exchange.
What are the three types of assets that 1231 assets consist of?
Pure 1231 assets:
-Land
1245 Assets:
-Personal Property & Intangibles
1250 Assets:
-Depreciable Real Property
True or false: depreciation recapture rules changes the character and the amount realized
false–it DOES change the character (from 1231 assets to ordinary income), but not the amount realized
What are the key facts of 1245 Assets?
-Personal property and amortizable intangible assets are 1245 assets
-The lesser of (1) gain recognized or (2) accumulated depreciation is recaptured (charactered) as ordinary income under 1245
-Any remaining gain is 1231 gain
There is no depreciation recapture on assets sold at a loss
True or false: recapture rules don’t apply to losses
True!
True or false: depreciable real property (such as an office building or a warehouse) sold at a gain is subject to 1245 depreciation recapture.
False–it is not
True or false: depreciable real property (such as an office building or a warehouse) sold at a gain is subject to 1250 depreciation recapture.
True!
§1250 property
real property subject to cost recovery deductions.
Under 1250, when depreciable real property is sold at a gain, the amount of gain recaptured as ordinary income is limited to additional depreciation, defined as the excess of accelerated depreciation deductions on the property over the amount that would have been deducted if the taxpayer had used the straight-line method of depreciation to depreciate the asset.
