Chapter 3 Property Disposition Flashcards
Amount Realized Formula
Amount Realized = Cash Received + Fair Mkt Value of Property + Buyer ‘s Assumption of Liabilities - Seller’s Expenses
Disposition- Taxpayers can dispose of assets in many ways.
Every asset disposition triggers a realization even for tax purposes.
To calculate the amount of gain or loss taxpayers realize when they sell assets, they must determine the amount realized on the sale and the ADJUSTED BASIS of each asset they are selling.
When dealing with questions about the dual basis rule for Gifted Assets, always consider the SELLING PRICE.
The selling price will determine which basis to use.
By focusing on the selling price, you can determine the correct basis to use and how to compute any potential gain or loss.
If the selling price is ABOVE the donor/recipient original cost basis, use the donor’s basis to calculate the gain.
If the selling price is BELOW the FMV at the time of the gift, use the FMV to calculate the loss.
If the selling price falls between the donor/recipient’s basis and the FMV, there is no gain or loss for tax purposes.
Inherited Property:
The general rule is the heir’s basis in property passing from decedent to the heir is the fair market value on the date of the decedent’s death.
When someone inherits property from someone who has passed away, the heir’s basis for the property is its fair market value on the date the person died.
Property Converted from Personal Use to Business Use
Basis for Appreciated Property
For Appreciated Property (when the FMV at date of conversion is greater than the taxpayer’s basis in the property) the TAXPAYER will use THEIR BASIS to calculate Depreciation and GAIN OR LOSS at DISPOSITION,
Property Converted from Personal Use to Business Use
Property with a Basis Greater than Value, meaning COST BASIS is greater than FMV.
For Property with a Basis Greater than Value
For Property that has lost its value
For Property where its value is less than FMV
This refers to property where the cost basis (what the owner paid for it or its adjusted basis) is HIGHER than its Current FMV. In other words, the property has lost value since its was acquired.
When CONVERTING Personal Property to Business Use
if the property’s value has INCREASED, the BASIS for calculating DEPRECIATION or Future GAIN or LOSS is its ORIGINAL COST, NOT the higher FMV at the time of conversion.
Question: What is Esteban’s initial basis in the equipment for business purposes DEPENDS on whether Esteban is calculating for a GAIN or LOSS.
Adjusted Basis = Initial basis - Cost Recovery Allowed
To determine the gain or loss on the sale of an asset, you calculate the adjusted basis by starting with the initial basis (however determined) and then subtracting any depreciation or other types of cost recovery deductions allowed or allowable on the property.
The adjusted basis of an asset can be determined using
Adjusted Basis = Initial basis - Cost Recovery Allowed
To determine the gain or loss on the sale of converted property, you must first consider whether the property appreciated or declined in value during its personal use.
If the fair market value of the asset on the date of the gift is greater than the donor’s basis, then the asset’s initial basis to the recipient of the gift will be the same as the donor’s basis. That it the donor’s basis carries over to the donee.
Realized Gain or Loss on Disposition
Gain or (loss) Realized = Amount Realized - Adjusted Basis
Realized Gain or Loss on Disposition
Gain or (loss) Realized = Amount Realized - Adjusted Basis
