Chapter 11 Flashcards
Capital asset-
The catch all category in our income tax system; all assets that are not specified as ordinary income assets or section 1231 assets are capital assets. IRC Section 1221 defines capital assets as all assets other than; accounts and notes receivable; copyrights, musical and literary compositions, and artistic creations in the hands of the author; inventory; and real or depreciable personal property used in a trade or business.
What is the difference between ordinary income and gains on capital assets.
Ordinary income is taxed when earned, while capital assets are taxed only when there has been both a realization event (sold or exchanged) and a recognition event for federal income tax purposes.
Realization vs recognition
Realization- when the asset is sold or exchanged. Recognition is how the capital asset is treated for tax purposes.
Sale or Exchange requirement
In order for a gain to be subject to income tax, there must first be a sale or exchange of the asset.
T/F Natural disasters that destroy property cause a realization event to occur for income tax purposes, since the gain or loss in a particular property can be calculated at that time
True
Calculation of Gain or Loss Equation for a Capital Asset
Amount realized less: adjusted basis= Gain or Loss
Recognition Rules for Capital Assets
The default rule for income taxation is that all gains realized are recognized, unless a special provision of the Code exempts or defer the gain from taxation.
T/F If a capital loss occurs, the loss is generally recognized for income tax purposes.
True, but there are circumstances where losses that are realized are disallowed on either a permanent or temporary basis.
Disallowed Losses-
Losses that are realized, but are not permitted to be recognized.
List a few disallowed losses
Losses on sale of personal use assets, losses on the subsequent sale of property gifted or sold to a related party when its fair market value is less than the original owner’s adjusted basis. Was sales.
What are the two holding periods for capital gains/losses
Long-term which is greater than a year or short term which is greater than or equal to a year.
Inherited Property
There are a few special rules concerning holding periods that are worth noting. First, whenever property is revived from a decedent’s estate, it is deemed to have long-term holding period.
Special Rule Gifted Property
The second special rule concerning holding periods applies to gifted property. When gifted property has a fair market value in excess of the donor’s basis in the property on the date of the gift, the donee’s holding period will tack on the donor’s holding period.
T/F If the gifted property has a fair market value on the date of gift that is less than the donor’s basis in the property, the donor’s holding period will tack on to the donor’s holding period.
False, it will depend on the subsequent selling price. If the donee subsequently disposes of the property at a loss the donee’s holding period starts on the date of the gift. If the donee subsequently disposes of the property at a gain, the donee’s holding period includs the donor’s.
Third Special Rule
The third special holding period rule deals with property acquired in a related party transaction. When property is sold to a related party the holding period used determine whether any subsequent gains or losses are short-term or long-term is based solely on the purhcaser’s holding period.
