Chapter 13: Property Transactions Sec 1231 And Recapture Flashcards

1
Q

Section 1231 property

A

Primarily business property, real or depreciable, used in a trade or business with a holding period of more than one year

Timber, coal, or domestic iron ore
Livestock
Unharvested crops

Not investment property

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2
Q

Net sec. 1231 gains

A

Treated as long term capital gains (and losses)

BUT portion may be treated as ordinary income due to 5-year look-back rule

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3
Q

Net sec 1231 losses

A

Then section 1231 gains and losses treated as ordinary gains and losses

Means they’re fully deductible in the current year

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4
Q

Five-year look-back rule

A

Any section 1231 gain is treated as ordinary gains to the extent of any nonrecaptured net sec 1231 losses from the previous five years

So section 1231 losses deducted as ordinary losses in the previous 5 years are recaptured by changing what would otherwise be a long term capital gain to ordinary income

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5
Q

Section 1231 loss from a passive activity

A

Subject to passive activity loss rules

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6
Q

Determining amount of nonrecaptured net section 1231 losses

A

Aggregate amount of net sec. 1231 losses for 5 preceding tax years
Vs
Any amounts recaptured as ordinary income in those tax years

Excess of nonrecaptured over previously recaptured is the net nonrecaptured loss

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7
Q

Adjusted net capital gain

A

ANCG

Net capital gain determined without regard to
- 28% rate gain (collectables and some sec. 1202 gain)
- unrecaptured section 1250 gain

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8
Q

Order in which net section 1231 gain is recharacterized as ordinary income under the 5-year lookback rule

A

1) net section 1231 gain in the 25% group (unrecaptured 1250 gain)
2) net section 1231 gain in the 20% or 15% group

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9
Q

Depreciable property and real property used in a trade or business held for one year or less

A

Neither capital assets nor section 1231 property

All gains and losses ordinary

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10
Q

Items specifically excluded from section 1231 property

A

Inventory
Government publications received other than by purchase
Patents
Inventions
Designs
Secret formulas
Copyrights
Literary, musical, or artistic compositions
Letters or memorandums
Property held by its creator

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11
Q

Section 631

A

Allows taxpayers to ELECT to treat the cutting of timber as a sale or exchange of said timber IF:
- taxpayer owns the timber or holds the contract right on the first day of the year or for more than one year
- timber is cut for sale or for use in taxpayers trade or business

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12
Q

Computing gain or loss on cutting of timber treated as sale of timber

A

Comparing timber’s adjusted basis for depletion with it’s FMV on the first day of the tax year in which it is cut

Any difference between this FMV and actual sale price is an ordinary gain or loss

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13
Q

If election is made to treat the cutting of timber as sale or exchange

A

Timber is the section 1231 property and gains and losses are 1231 gains and losses

If no election tax treatment depends on if timber is held for sale in course of trade or business or if held for investment or for use in trade or business

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14
Q

Disposal of coal or domestic iron ore

A

If disposed of while retaining an economic interest in it the disposal must be treated as sale of section 1231 property

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15
Q

Economic interest in minerals

A

Owned when an individual acquired by investment any interest in mineral in pace and seeks a return of capital from the income derived from its extraction

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16
Q

Livestock

A

ONLY MAMMALS

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17
Q

When livestock is section 1231 property

A

Livestock held for 12 months or more for draft, breeding, dairy, or sporting purposes.

Cattle and horses must be held for more than 24 months from acquisition to be section 1231 property

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18
Q

When are unharvested crops section 1231 property

A

Unharvested crop growing on land used in a trade or business IF both crop and land are sold at the same time to the same person and the land is held for more than one year

Not 1231 if seller retains any right or option to reacquire the land

Means that no deductions are allowed for expenses attributable to the production of the unharvested crops (cost of production must be capitalized)

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19
Q

Involuntary conversions of property used in trade or business

A

Generally treated as section 1231 gains or losses

Includes involuntary conversions of capital assets held in connection with a trade or business or in a transaction entered into for profit

As long as held for over one year

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20
Q

Condemnation of section 1231 property and capital assets

A

As long as held for over a year, treated as section 1231 gains and losses (as long as held in connection with trade, business, or a transaction entered into for profit)

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21
Q

Gains or losses from involuntary conversion due to fire, storm, shipwreck, other casualty, or theft

A

If losses exceed gains: not classified as 1231 gains and losses (ordinary)

If gains exceed losses: classified as section 1231 gains and losses

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22
Q

Steps for analyzing sec 1231 transactions

A

1) determine recognized gains or losses
2) determine if any gain must be recaptured under section 1245 and 1250 as ordinary income
3) determine if there are net sec 1231 gains or losses
4) if there is a net gain determined if there is any nonrecaptured net section 1231 loss

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23
Q

Determining net section 1231 gain or loss

A

Net together
- net casualty and theft gains from section 1231 property/ non-personal-use property held over 1 year (if net loss is ordinary loss)
- gains and losses from sale or exchange of section 1231 property
- gains and losses resulting from the condemnation of section 1231 property and non-personal-use capital assets held more than one year

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24
Q

Treatment of net section 1231 loss

A

All section 1231 gains and losses treated as ordinary losses and gains

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25
Q

Treatment of net section 1231 gain

A

All gains and losses treated as long term capital gains

Portion may be required to be recaptured as ordinary income under 5-year lookback rule

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26
Q

Section 1245 property

A

Certain property subject to depreciation, and in some cases, amortization.
- depreciable personal property
- automobiles
- livestock
- railroad grading
- single-purpose agricultural or horticultural structures
- intangible assets subject to amortization under sec 197

Generally not buildings (except for certain buildings placed into service between 1981-1986

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27
Q

Section 1245 recapture provisions

A

Any gain received from the disposition of section 1245 property must be treated as ordinary income to the extent of the total amount of depreciation/ cost recovery deductions allowed since Jan 1 1962

(Generally makes entire gain ordinary income)

Changes character not amount of the gain

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28
Q

Gain on 1245 property in excess of allowed or allowable depreciation

A

Receives section 1231 treatment

29
Q

Loss on section 1245 property

A

Recognized as section 1231 loss if fits requirements

30
Q

Sec 1245 and the Cost of depreciable property expensed under sec 179

A

Any section 179 expense treated as a depreciation deduction for purpose of section 1245

31
Q

Preferential treatment for certain amortized costs

A
  • expensing of up to $15000 used to make business facility more accessable
  • amortize pollution control facilities over 60 months
  • amortize reforestation expenditures over 84 months
32
Q

Sec 1245 and Preferential treatment for certain amortized costs

A

If the special provisions were applied then section 1245 recapture applies to any gains resulting from the disposition of the property

33
Q

Limitations on section 1245 and real estate

A

Section 1235 does not apply to;

  • residential real estate qualified as recovery property under ACRS rules unless taxpayer used straight line depreciation.
  • depreciable real estate acquired after 1986
34
Q

Section 1250 property

A

Any depreciable real property other than section 1245 property

Includes nonresidential real estate place into service before 1981

35
Q

Section 1250 recapture

A

Converts section 1231 gain into ordinary income on the exchange or sale of real property to the extent of any additional/excess depreciation taken over depreciation that would be deductible under the straight-line methods

36
Q

How can noncorporate taxpayers avoid section 1250 recapture

A

-using straight line method of depreciation or cost recovery on section 1250 property
- holding section 1250 property for it’s entire useful life/recovery period

37
Q

Section 1250 and real property placed into service after 1986

A

Section 1250 is moot and depreciation recapture not required because real property placed into service after 1986 must use straight line depreciation

38
Q

Gain recognized as ordinary income under section 1250 recapture

A

Actual depreciation - straight line depreciation= maximum amount of gain to be recognized as ordinary income due to excess depreciation

39
Q

Unrecaptured section 1250 gain

A

The amount of long term capital gain which would be ordinary income IF section 1250 provided for the recapture of ALL depreciation, instead of just excess

40
Q

Tax treatment of unrecaptured section 1250 gain

A

Taxed at a maximum rate of 25%

“Any of the LTCG due to depreciation other than excess depreciation is unrecaptured section 1250 gain taxes at a maximum rate of 25%”

41
Q

Unrecaptured section 1250 gain for buildings placed into service after 1986

A

All section 1231 gain to the extent of depreciation is unrecaptured section 1250 gain (because only straight line depreciation is allowed)

42
Q

What determines tax treatment for depreciable real estate

A
  • method of depreciation used
  • when property was placed in service
  • how property was used
43
Q

Residential rental property

A

80% or more of gross rental income from the building or structure must be rental income from dwelling units

But not if more than 1/2 units are used on a transient basis (hotel/motel/inn)

44
Q

When does section 1245 apply

A

If a building is placed into service after 1979 and before 1987, and
- accelerated cost recovery is allowed, and
- building is not used as residential rental property

45
Q

Tax rate for section 1250 recapture of excess depreciation

A

Rate for ordinary income

46
Q

Tax rate for section 1245 recapture of depreciation

A

Rate for ordinary income

47
Q

Tax rate for unrecaptured section 1250 gain

A

25%

48
Q

Tax rate for any portion of section 1231 gain that becomes adjusted net capital gain

A

Applicable Preferential capital gain rate

49
Q

Depreciable real property placed into service before 1981

A

Section 1250 property. So if elected accelerated depreciation (once it was available) may have sec 1250 ordinary income for excess depreciation and also unrecaptured section 1250 gain

50
Q

Gain due to excess depreciation for buildings used as residential rental property placed in service between 1981 and 1986

A

Section 1250 ordinary income

BUT all of these buildings are fully depreciated now so there is no excess depreciation

51
Q

Tax treatment for sale of non residential rental property buildings placed into service between 1981 and 1986

A

Accelerated cost recovery used: building is section 1245 property (all gain due to depreciation is ordinary income)

Straight line cost recovery method used: property is section 1350 property. None of the gain is ordinary income (for noncorporate taxpayers)

52
Q

Tax treatment for sale of real property placed into service after 1986

A

Only straight line depreciation allowed

= No section 1250 ordinary income but gain due to depreciation is unrecaptured 1250 gain subject to maximum tax of 25%

53
Q

Low income housing credit

A

Available to owners of qualified low-income housing projects for tax years after 1986

If housing unit held for 16 years and 8 month none of the additional depreciation is subject to recapture as ordinary income

54
Q

Additional recapture rules for corporations

A

Section 291

If depreciable real estate is sold or disposed must recapture as ordinary income 20% of the difference between the amount that would be recaptured if property was sec 1245 property and actual section 1250 recapture (latter is almost always 0)

55
Q

Hierarchy of section 1245 and 1250 provisions

A

Unless an exception is stated in section 1245 or 1250 these sections take precedence over other provisions of tax law

56
Q

Recapture for gifts of property

A

Gift does not result in recapture of depreciation BUT donee must consider recapture when disposing of property. Their recapture amount includes recapture amount attributable to donor

57
Q

Recapture for property transfered on death

A

Depreciation recapture does not occur at transfer NOR does potential for recapture carry over to the recipient

58
Q

Recapture provisions and charitable contributions

A

Since deduction for charitable contributions of ordinary income property limited to adjusted basis (FMV less gain that would have been recognized as ordinary income if sold at FMV) contribution deduction for recapture property already reflects ordinary income recognized

59
Q

Tax treatment of boot received in like-kind exchange of sec 1245 or 1250 property

A

Recognized gain = lesser of realized gain or boot received

Gain = ordinary income to the maximum amount of gain covered by recapture provisions

If no gain recognized then recapture potential carries over to the replacement property

60
Q

Involuntary conversion of section 1245 or 1250 property

A

Amount of gain considered to be ordinary income cannot be more than the recognized gain

61
Q

Recapture provisions for installment sales

A

Recapture income must be recognized in the year of sale, even if no payments are received

Any excess gain over the departure amount will be reported under the installment method.
- for the installment method the amount of recapture income recognized is added to the adjusted basis for the gross profit ratio

62
Q

Recapture of section 179 expensing election

A

If taxpayer elect to expense acquisition cost under section 179 and the property is subsequently converted to nonbusiness use tax benefits from the election must be recaptured and added to taxpayer’s income in the year of conversion

Recaptured amount = difference between amount expenses under sec 179 and what would have been claimed without sex 179

63
Q

Recapture of deducted conservation expenditures

A

Taxpayers engaged in business of farmer may deduct certain expenditures made for soil and water conservation that would otherwise be capital expenditures.

If land is held for less than 9 years before disposed of the taxpayer must recognize as a gain the lesser amount of the realized gain or the expenditures x recapture percentage

Recapture percentage is 100% if farmland disposed of within 5 years of acquisition and declines by 20% for each year held after that (so if disposed after 9 years no recapture)

64
Q

Recapture of intangible drilling and development costs

A

IDCs are either immediately expensed or capitalized and depleted

Gain on sale of oil and gas properties may be ordinary income to the extent of the lesser of IDC and depletion or the total gain, due to recapture

65
Q

Gain on sale of depreciable property between related parties

A

Sec 1239: All gains is ordinary income if property is subject to depletion in the hands of the transferee. (Doesn’t matter if sale is direct or indirect)

If subject to depreciation recapture under 1245 or 1250 those sections are considered first

Constructive ownership rules apply

66
Q

Ways to avoid recapture provisions

A
  • holding property for a specified period
  • disposing of property in like-kind exchange (without boot) (recapture deferred)
  • used to offset losses that might otherwise expire
  • transfer property at death
67
Q

Form to report gains and losses from sales or exchanges of assets used in trade or business

A

Form 4797

Also involuntary conversions other than casualties and thefts

68
Q

Order in which to complete parts of form 4797

A

Part III first, then I and II

69
Q

Form to report casualty or theft gain or loss

A

Form 4684