Ch 5 Flashcards
Name 6 other types of dispositions of property where gains and losses are realized?
1 exchanges 2 condemnations 3 casualties 4 thefts 5 bond retirements 6 corporate distributions
Realized gain/loss
Amount realized from sale or exchange of property
Compared with adjusted basis of that property
Gain, when greater than basis
Loss, when less than basis
The terms realized gain and recognized gain are often…
Different dollar amounts for the sale of the asset
Amount realized, from sale or disposition of property
Sum of any money received, FMV of all other property
received and debt assumed by the buyer
Fair market value (FMV)
Price at which property would change hands between
Willing buyer and willing seller
Neither being under compulsion to buy or sell
What does the adjusted basis depend on?
How the property is acquired (purchase, gift, inheritance)
Adjusted basis for purchase of property
Cost of the property
Adjusted basis: when property is acquired from a decendent
Basis to estate or heir is its FMV at date of death or Alternative valuation date elected 6 months from date of death
Capital additions AKA Capital expenditures
Add value/prolong life of property
Or adapt property to new or different use
Equation for property’s adjusted basis
Adjusted basis =
Initial basis
+ capital additions
- capital recoveries
Capital recoveries, what 3 things do they include?
Reduce basis of property
Include deductions for casualty losses, cost recovery,
Depreciation
Recovery basis doctrine
Taxpayers are allowed to recover basis of asset without
Being taxed because such amounts are return of capital
Taxpayer invested in property
Recognized gain or loss
Amount of gain or loss actually reported on tax return
When are deductions for depreciation allowed with an asset held for either of 3 things?
1 If asset is used in trade
2 business
3 held for production of income
Cost
Amount paid for property in cash
Or FMV of other property given in exchange
Funds borrowed and used to pay for asset…
Are included in the cost
Uniform capitalization rules (for financial accounting purposes)
Businesses must capitalize inventory costs of direct
materials, direct labor and overhead
Taxes paid or accrued in connection with acquisition or
Disposition of property are part of cost of property
Capitalization of interest
Interest on debt paid or incurred during production period
To finance expenditures (construct, build, install, manufacture,
Develop, improve) must be capitalized
Property received as gifts: if FMV of property is equal or greater than donor’s basis, the donee’s basis is…
The same as the donor’s basis
Will increase if donor paid gift tax
Property received as gifts: if the FMV is less than the donor’s
Basis, the donee has a dual basis for the property: 1)what is the basis for a loss? 2) basis for a gain
1) donee transfers at loss: donee’s basis is property’s FMV
at time of gift
2 donee transfers property at gain: donee’s basis same
As donor’s basis
Effect of gift tax on basis
Increase of basis only if FMV of property exceeds donor’s
Basis on date of gift
Gift tax addition to basis equation
Donor’s basis +
[Gift tax paid x (FMV at time of gift- donor’s basis)/ amount of gift]
Note amount of gift =
fair market value - amount of annual exclusion
Property received from decedent: alternative valuation date (AVD)
Generally 6 months after the date of death, basis equal to
FMV on date of distribution
Only used when estate is subject to estate tax and assets
Decrease in the 6 month period (reduces estate tax)
Property converted from personal use to business use
Properties basis must be Determined
Basis: lower of FMV or adjusted basis of property when
Asset is transferred from personal use to business use
Allocation of Basis
If more than one asset is acquired in single purchases
Cost must be allocated on basis of relative FMVs
Allocation of basis: because no depreciation deduction is allowed for land, taxpayer’s tend to favor a…
Liberal allocation to total purchase price of the building
Common costs
Common costs occurred for obtaining or preparing asset
For service must be capitalized and allocated to individual
Assets
Stock rights AKA preemptive right
Represent rights to acquire shares of specified Corporation’s stock at specific exercise price if certain conditions are met
Maintain proportional ownership of corporation
Basis for no taxable stock dividend
Basis of stock dividend shares includes pro rata portion
Of adjusted basis of underlying shares owned
Non taxable stock right
If FMV of rights is less than 15% of stock’s FMV, the basis
Of rights is 0 unless election is made to allocate basis
Basis of underlying stock is allocated to rights based on
Respective FMVs of stock and rights
5 items that aren’t considered capital assets for tax purposes
1 inventory/ to be sold to customers 2 property used in trade or business 3 A/R, N/R 4 supplies usually consumed 5 letter of memorandum, copyrights
1) When is an automobile considered a capital asset?
2) when is it not considered a capital asset?
1 when it’s held for personal use
2 when it’s held for business use
6 assets that qualify as capital assets
1 personal residence 2 land held for personal use 3 investment in stocks 4 investment in bonds 5 patents 6 franchises
Sale of Futures contracts related to purchase of raw materials, how are they treated?
As ordinary income
Dealers in securities
Unless they specify it as an investment, securities held be
Dealers are taxed as ordinary income
Non corporate dealers that subdivide real property into lots can treat sale as…
A capital gain, if held for 5 years and improvements are made
Non business bad debt losses
Are only deductible as short term capital losses and only
In year debt becomes totally worthless
Short term capital gain/loss
If asset held less than 1 year
Longterm capital gain/loss
Asset held over 1 year
Net capital gains (NCG)
Excess of net long term capital gain over net short term
Capital loss
Adjusted net capital gain (ANCG)
Subject to lower rates of 0, 15%, 20%
Only include gains from sale of financial securities
Net short term capital gains may be offset by…
Net long term capital losses
Name 2 Longterm capital gains (LTCG) that get taxed at 28%
1 collectibles gains
2 part of gain (50%) from sale or exchange of qualified small
Business stock
What category of Longterm capital gains (LTCG) get taxed at a maximum rate of 25%?
When does this type of gain occur?
Unrecaptured sec. 1250 gain
Generally occurs when buildings are sold
One can not have a loss connected with a…
Unrecaptured sec 1250 gain
Collectibles gain, what items are included
Artwork, rugs, antiques, stamps, most coins
Capital loss
Sell or exchange capital asset for amount less than adjusted
Basis
Net short term capital loss
Offset against NSTCG and NLTCG
if exceeds capital gains may be offset against non corporate
Taxpayer’s ordinary income up to $3,000/year
Capital loss carry forward AKA capital loss carryover
If capital losses exceed capital gains by more than $3,000
The remainder may be carried over for indefinite # of years
Expires when the tax payer dies
Qualified dividend tax rates
Taxed the same as long term capital gains
Net investment income tax (NII), define, what are the thresholds and when does it apply?
Affordable care act new 3.8% Medicare tax on interest,
NSTCG, NLTCG, Dividends, rental, royalty income
Tax is on lesser of net investment income or modified AGI
MAGI threshold is $200,000 single/head of household
$250k married
MAGI
Sum of AGI + net foreign earned income excluded
2 Significant differences between tax treatment of capital gains btw/ individuals and corporations
1 lower tax rates of %15, 20, 25, 28% don’t apply for
Corporations
2 can’t deduct $3,000 for capital losses
Corporations and capital loss carryovers
May carry capital losses back to the 3 proceeding tax years
And used in the 5 subsequent tax years
Treated as a short term capital loss
If a corporation uses a capital loss for its previous 3 years…
it receives a refund in the current year
What tax rate do corporations pay on capital gains?
35%
Sale
Transaction where one receives cash or equivalent
Including assumption of one’s debt
Exchange
Transaction where one receives reciprocal transfer of
Property
Worthless securities
If securities becomes worthless over year, it’s treated as
A loss from sale at the end of that tax year
Affiliated corporations, tax treatment in loss?
Own 80% or more of the company’s stock and engage in
Active conduct of operating business
Treated as loss in ordinary income in loss
Treatment of retirement of debt
If debt is retired, it’s treated like a sale or exchange
If an option is held for more than a year at a gain, the gain is considered?
Still considered a short term gain
Patents tax treatment
As long term capital gains for inventor or acquirer if
acquired before patent is put in use
Substantial rights of patent
Inventor gives rights of patent with no restrictions to
company for money
Treated as long term capital gain
Franchises, trademarks and trade names
are only recognized As capital gains when completely
transferred
Income from their use is treated as ordinary income
Holding period, when is gain/loss considered longterm
Length if time asset is held before it is disposed
Must be held 1 day longer than a year to be considered
Long term
When determining the holding period for marketable
Securities it is important to use..
The trade dates, not the settlement dates
Property received as a gift
Donor’s basis and holding period are used
When is the donee’s basis the FMV of the property on the date of the gift? 2) when does the holding period start?
Occurs when FMV is less than donor’s basis on date of gift
And the property is subsequently sold at a loss
2) donee’s holding period starts day after date of gift
Holding period for property received from decedent
Always treated as long term
Mobility of capital
Without preferential treatment of capital gains, tax payers
Who own appreciated capital are unwilling to sell assets
Instead of pursuing other profitable investments
Reasons for preferential treatment of capital gains
1 mobility of capital
2 mitigation of inflation
3 lowers cost of capital
Lowers cost of capital
Reducing capital gains tax rate makes investors more
Willing to provide businesses with capital
Important for formation of growth for small business
Maximum non taxable gift
$14,000
It is not advantageous to make gift where…
Basis exceeds the FMV, because Donee must use FMV
as their basis for loss
Why is it advantageous to gift appreciated property for
The donee?
The donee has a higher basis as a result of gift taxes
Paid
