Ch 4: Capital Gs/Ls and Property Taxation Flashcards
What is the tax treatment of capital gains/losses?
Net capital losses are deducted up to a maximum of $3,000 per year against non-capital income.
Any excess can be carried forward. - Capital gains are fully taxable (but at lower tax rates).
Holding period: Short term - one year of less vs. Long term - more than one year.
In general, how is the donees basis of a gift determined? How is the holding period determined?
1) In general, the donees basis of a gift is the same as donors basis
2) If the sale is greater than the donors basis, then the gain is the difference between the donors basis and the sales price.
3) If the sale is less than the FMV, the loss is the difference between the FMV at the date of the gift and the sales price.
4) If the sale is at less than basis but greater than FMV, no gain or loss is recognized. 5
) The holding period includes the donors holding period unless basis becomes FMV, then holding period starts at date of gift.
In general, how is the basis of inherited property determined? How is the holding period determined?
1) FMV at date of death OR
2) FMV at alternate lower valuation date (if elected), which is:
A) 6 months from date of death
B) Disposal date (if disposed of less than 6 months from date of death).
The holding period is auto deemed long term for all inherited property, regardless of how long the deceased owned the property.
When is gain not taxed? HIDE IT
1) H - Homeowner’s exclusion.
2) I - Involuntary conversions
3) D - Divorced property settlement
4) E - Exchange of like-kind business/investment assets (tangible)
5) I - Installment sale
6) T - Treasury and capital stock transactions (by corporation)
Describe the homeowner’s exclusion
The sale of the taxpayer’s personal principal residence is subject to an exclusion from gross income for gain:
- $500,000 is available for MFJ
- $250,000 is available for S, MFS, and HOH
To qualify, must pass both tests:
- Ownership test: a taxpayer must have owned the property as a principal residence for 2 years or more during the 5 yr period
- Use test: a taxpayer must have used the property as a principal residence for 2 years or more during the 5 yr period
- MFJ: one spouse may meet the ownership requiremment, but BOTH must meet the use requirement. If only one qualifies for use, then $250,000
- Widow: if widow sells a house that the surviving spouse owned and occupied with the decendent spouse, the surviving spourse is entitled to the full $500k exclusion if they sell the house within 2 years after the date of death
Note:
- there is a nonqualified use provision (limits gain & remainder is treated as capital gain)
- and a partial exclusion if the sale is due to a change in place of employment, health, or unforseen event (limits exclusion, $250k or $500k)
Describe the involuntary conversions
No gain is recognized for insurance proceeds from Destruction, theft, condemnation (the seizure of a property by a public authority for a public purpose), except when:
- if you keep any insurance proceeds for other purposes (pocket it), it is boot/loot and is taxable
- the ins proceeds you use for same purposes, then the gain is deferred
Must reinvest within 3 years from year end
The basis of the replacement property is its cost less the gain not recognized
All losses are recognized and the basis of the new property is its replacement cost
Describe exchange of like-kind business/investment assets (tangible)
Nonrecognition treatment is applied to exchange of like-kind business/investment assets (tangible), except
- inventory
- stock
- securities
- p-ship interests
- real property in different countries
Real property (land and building) used in a trade or business or investment that is exchanged for other real property qualifies as like-kind.
More stringent: Personal property (machine, equip, and auto) must be exchanged for other personal property that has the same general use (i.e. same assest class).
Timing requirements:
- taxpayers must identify like-kind replacement property within 45 days of giving up their property
- like-kind property must be received by the earlier of:
- 180 days after taxpayer transfers property
- the due date of the taxpayer’s income tax return
Gain when boot is received, the lower of:
- the realized gain
- boot received
Give formula for basis in like-kind property received when boot is received
FMV of Like-kind property received
(Deferred Gain)
+ Deferred Loss
= Basis in like-kind property received when boot is received
How to calculate realized gain when determining if gain recognized is the lesser of boot received or realized gain for like-kind exchange
FMV of new property received
+ FMV of boot received
(FMV of boot paid)
- Amount realized
Original Cost of old
(Depreciation of old)
- Adjusted Basis
- Amount realized
2. (Adjusted Basis of property given up)
Gain Realized
How to calculate boot received AND boot paid when determining if gain recognized is the lesser of boot received or realized gain for like-kind exchange
Cash Received
+ FMV of non-like-kind property received
+ net relief from liability
Boot received
Cash Paid
+ FMV of non-like-kind property paid
+ Net liability assumed
Boot paid
Identify the major tax provisions of involuntary conversions of property?
Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property. A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain: 1) Gain not recognized if proceeds reinvested in qualified replacement property. 2) Basis is cost of replacement property less any gain not recognized. 3) Losses recognized and basis is replacement cost. Holding period includes period that original property was held.
What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?
Gain exclusion for personal residence: 1) $250,000 for single taxpayers 2) $500,000 for married taxpayers
Identify the criteria for the exclusion provision on the sale of personal residence.
1) Taxpayer must have owned and used the property as the principal residence for 2 years or more during the 5 year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable (sales/periods after 2008). 2) Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property. 3) Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous 2 years or fail to meet the ownership and use requirements. 4) No age requirement. 5) No rollover to another house is required. 6) Renewable, can be utilized more than one time.
Criteria for a classification as like-kind exchange.
1) Tangible real or personal property 2) Used in trade or business 3) Held for investment (except inventory, stock, and securities)
In a like-kind exchange, what is the basis of the property received?
The basis of property received retains the basis of property given up. Formula: (Basis of property given up + any boot paid + any boot received (at FMV) + any gain recognized = Basis of property received) Recognize gain to the extent of the lower of the realized gain or boot received.
