Chapter 12 Flashcards
Sales and Exchanges of Property
Cost basis when receiving property as income?
The taxpayer may have received the property as compensation for services rendered. In such a case, the taxpayer receiving the property will have a basis equal to the fair market value of the property at the time it was received. This amount would also generally be the amount of income that would be taxable as a result of the payment of compensation in the form of property.
Cost basis when selling property with multiple cost basis?
If the taxpayer can adequately identify the actual shares or units being sold, then the basis of those specific shares or units can be used as his or her basis in calculating realized gain or loss. If the taxpayer cannot specifically identify the shares sold, basis will be calculated using a “first-in, first-out” (FIFO) method of identification. When a taxpayer sells or redeems shares in a mutual fund, the taxpayer is permitted to use the average cost of all the mutual fund shares.
Adjustment for Gift Taxes Paid
Example
Example
John owns a rare coin with a basis of $10,000. The coin has a fair market value of $25,000 when gifted to his son. John pays a gift tax of $5,000 on the transfer of the coin. As a result of gifting an appreciated asset to his son, an adjustment for gift taxes paid will apply. The son’s basis in the gifted property is $13,000 ($15,000 in appreciation divided by the coin’s fair market value of $25,000, or 60 percent). Therefore 60 percent of the gift tax paid by John will serve as a basis adjustment for his son.
Special rule for the sale of gifted property?
Example
John owns stock in the Siavash Corporation, a privately owned company. He gives his stock in Siavash to his friend, Oliver. John’s basis in the stock at the time of the gift was $100,000, and the value of the stock was $10,000. Oliver sells the stock a year later for $8,000. Oliver’s realized loss from the sale for tax purposes is $2,000 ($10,000 – $8,000), because the stock’s value at the time of the gift ($10,000) was less than John’s basis at that time ($100,000). Oliver cannot use John’s basis of $100,000 to calculate a deductible loss on the sale of the property. Alternatively, if Oliver sold the stock for $110,000, his realized gain from the sale is $10,000 ($110,000 – $100,000). However, if Oliver sold the stock for $80,000, Oliver would realize neither a gain nor a loss on the sale (the selling price falls between the gain basis of $100,000 and the loss basis of $10,000).
Property 1031 like kind exchange.
The exchange can be a direct exchange, three-party exchange, or a non-simultaneous exchange. A non-simultaneous exchange is treated as a like-kind exchange if the property to be received in the exchange can be identified within 45 days of the transfer of the property relinquished in the exchange. The replacement property must be received within the earlier of 180 days or the due date of the return (including extensions) for the tax year in which the relinquished property was transferred.
1031 Exchange non-qualifying property.
Tangible or intangible personal property that is ineligible for like-kind exchange treatment would include
• inventory (or stock in trade) of a business taxpayer
• corporate securities (including stocks, bonds, or any debt or equity securities) or ownership of interests in an unincorporated business (i.e., partnerships)
1031 exchange to a related person?
The definition of “related persons” for this purpose includes immediate family members, ancestors, descendants, and certain business entities that are owned or controlled by other business entities.
If the taxpayers taking part in an exchange are related persons, generally each taxpayer
must keep the property for 2 years after the date of the exchange. If one of the parties to the exchange sells the property received in the exchange before the 2-year period is up, both the selling party and the other party to the exchange will have a taxable event. The party who received the property that is later sold will be taxed, and the party who transferred the prop- erty to the related person will also be taxed.
1031 Exchange to related persons? Example
Example
Lonnie and Clem are brothers. One year ago Clem received a parcel of land from Lonnie in a like-kind exchange. Lonnie’s basis in the land transferred to Clem was $50,000. The value of the land at the time of the exchange was $70,000. Clem now sells the land for $80,000. As a result of this sale, Lonnie will recognize $20,000 ($70,000 – $50,000), the amount of his gain that was deferred in the exchange. Clem will recognize $10,000 of gain ($80,000 – $70,000) when he sells the land. His gain is only $10,000 because the amount of gain recognized by Lonnie is “taken into account” (that is, added to Clem’s basis) in calculating Clem’s gain from the sale.
Boot property
In a like-kind exchange, often cash or other property will be involved in the exchange along with the like-kind property to equalize the value of property surrendered to that of the value of property received. In such an exchange, the cash or other property that is not property of like kind is referred to as boot property.
The transaction is treated as partially taxable.
1035 exchange
Sec. 1035 of the Internal Revenue Code provides that no gain or loss will be recognized for income tax purposes upon the exchange of one life insurance, endowment, or annuity con- tract for another life insurance, endowment, or annuity contract if certain requirements are met.
A life insurance contract may be exchanged under Sec. 1035 for another life insurance contract, an endowment contract, or an annuity contract.
True
An endowment contract may generally be exchanged for another endowment contract, LI or for an annuity contract.
False
An endowment contract may generally be exchanged for another endowment contract or for an annuity contract.
An annuity contract may be exchanged without recognition of gain only for another annuity contract and not for a life insurance or endowment contract.
True
1035 exchange same insured person requirement
There is a same-insured requirement under Sec. 1035. Specifically, the insured under a life insurance contract must be the same person in both the old and the new contracts when a life insurance policy is exchanged for another life policy. Where an annuity contract is exchanged for another annuity, the same insured requirement is satisfied by having the primary annuitant under the new contract be the same person as under the old contract.
WASH SALES
Taxpayers are not permitted to recognize a realized loss from the sale of corporate stock or other securities if the same stock or security is repurchased by the taxpayer within a 30-day period beginning before or ending after the sale in which the loss was realized. The purpose of this provision is to prevent a tax-avoidance technique in which a taxpayer could (in the absence of the wash sale rule) sell stock, claim a tax loss from the sale, then quickly repurchase the same stock so that the taxpayer’s economic position regarding the stock is essentially unchanged, but a tax savings is generated.
