Chapter 4 Flashcards
reporting of gains and losses is dependent on
the nature of the property and the length of time the property has been owned
Gains and losses on the sale of capital assets are known as
capital gains and losses
capital l/g ca be
short-term or long-term
holding period
The period of time that property has been held by a taxpayer. The holding period is of significance in determining whether gains or losses from the sale or exchange of capital assets are classified as long-term or short-term
capital asset
as any property, whether used in a trade or business or not, other than: Stock in trade, inventory, or property held primarily for sale to customers in the ordinary course of a trade or business; Depreciable property or real property used in a trade or business (Section 1231 assets); A patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, if the property is created by the taxpayer; Accounts or notes receivable; and Certain U.S. government publications. (no intangible/ depreciable assets, no future money)
long term holding period
>1yr
Short-term capital gains are taxed as
income
adjusted basis
The cost or other basis of property reduced by depreciation allowed or allowable and increased by capital improvements. See Basis.
adjusted basis formula
original basis+ improvements- depreciation
to recognize a gain/loss
you must no longer have it (sale/exchange)
sale or exchange can mean
sale for cash exchange for other assets exchange for stocks/bonds exchange for liability relief any transfer of ownership
amount realized
everything you got in return for your asset: cash liabilities value fair market value of other property less transfer costs
gain loss formula
amount realized-depreciation + capital improvements= gain or loss realized
fees included in the basis of real property
utility installation legal fees recording fees survey fees transfer taxes title insurance liabilities of the seller assumed by the buyer(loans, interest, back taxes)
fees not included in basis
escrow for future payments casualty insurance rent utilities before closing charges connected with obtaining a loan
Capital improvements are
major expenditures for permanent improvements to or restoration of the taxpayer’s property that increase the value or useful life substantially or adapt a property to a new use
inherited property original basis is
equal to the fair market value at decedents date of death
gift property original basis is
depends on if sold for gain or loss by recipient if sold for a gain, original basis is equal to the donor’s if sold for a loss it is the lower of either the donor’s or fair market value at date of the gift
Long-Term Capital Gains
Taxed at 0, 15, or 20 percent depending on level of other taxable income
Long-Term Unrecaptured Section 1250 Gain
Capped at 25 percent tax
Long-Term Collectibles Gains (Art, Gems, Coins, Stamps, etc.)
Capped at 28 percent tax
ains are included in taxable income in the following order
Short-term capital gains
Unrecaptured Section 1250 gains on real estate
Gains on collectibles
Long-term capital gains
to calculate tax liability with gains/ losses
taxpayer has to net all of the long-term and short-term capital transactions that take place during a year
How to net l/g
Capital gains and losses are classified into two groups, long-term and short-term.
Long-term capital gains are offset by long-term capital losses, resulting in either a net long-term capital gain or a net long-term capital loss.
Short-term capital gains are offset by short-term capital losses, resulting in a net short-term capital gain or a net short-term capital loss.
If Step 2 above results in a net long-term capital gain, it is offset by any net short-term capital loss (Step 3), resulting in either a net long-term capital gain (net long-term capital gain exceeds net short-term capital loss) or a net short-term capital loss (net short-term capital loss exceeds net long-term capital gain). If Step 2 above results in a net long-term capital loss, it is offset against any net short-term capital gain (Step 3), resulting in either a net long-term capital loss (net long-term capital loss exceeds net short-term capital gain) or ordinary income (net short-term capital gain exceeds net long-term capital loss).
Individual taxpayers may deduct net capital losses
against ordinary income in amounts up to $3,000 per year, and may carry forward a loss into future years.
capital loss carryovers
The loss from the sale or exchange of a capital asset. A loss from a property held 12 months or less is deemed to be a short-term capital loss. If the property is held more than 12 months, the loss is deemed to be long-term.
first offset capital gains, otherwise offsets ordinary income up to 3000
When unused capital losses are carried forward
they maintain their character as either long-term or short-term
large capital losses can be wiped out by
selling stock and property. This also wipes out the capital gains and fully shelters them from tax.
Losses from the sale of personal capital assets
are not allowed for tax purposes.
Net Capital Losses offset capital gains
Net short-term capital losses first reduce 28 percent gains, then 25 percent gains, then regular long-term capital gains.
Net long-term capital losses first reduce 28 percent gains, then 25 percent gains, then any short-term capital gains.
personal residence exclusion
The sale of a personal residence may result in the recognition of capital gain (but not loss). Taxpayers may permanently exclude $250,000 ($500,000 if married) of gain on the sale of their personal residence from income provided certain requirements are met, but generally not more than once every two years.
personal residence includes
single-family homes, mobile homes, houseboats, condominiums, cooperative apartments, duplexes, or row houses.
A seller otherwise qualified to exclude gain on a principal residence who fails to satisfy the 2-year ownership and use requirements may calculate the amount of excluded gain by prorating the exclusion amount if the residence sale is due to
an employment-related move, health, or unforeseen circumstances. Unforeseen circumstances include death, divorce or separation, a change in employment that leaves the taxpayer unable to pay the mortgage, multiple births from the same pregnancy, and becoming eligible for unemployment compensation.
net income from rental property is
taxable income to the taxpayer
rental income is reported
with the related expenses on Part I of Schedule E.
If services are provided to the tenant beyond those customarily provided, such as cleaning and maid services,
the income is reported on Schedule C and is subject to the self-employment tax.
vacation homes
The Internal Revenue Code places restrictions upon taxpayers who rent their residence or vacation home for part of the tax year. The restrictions may result in the limitation of certain expenses related to the vacation home.
Deductions attributable to vacation homes used primarily as personal residences are limited
he income generated from the rental of the property. In general, only profit or breakeven (no loss) tax situations are allowed on the rental of vacation homes.
Primarily Personal Use
If a residence is rented for fewer than 15 days during the year, the rental period is disregarded and it is treated as a personal residence for tax purposes. The rental income is not taxable and the mortgage interest and real estate taxes may be allowed as itemized deductions. Other expenses, such as utilities and maintenance, are considered nondeductible personal expenses.
Primarily Rental Use
If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as rental property. The expenses must then be allocated between the personal and rental days. If this is the case, the rental expenses may exceed the rental income, and the resulting loss would be deducted against other income, subject to the passive loss rules.
Rental/Personal Use
If the residence is rented for 15 days or more and is used for personal purposes for more than 14 days or 10 percent of the days rented, whichever is greater, allocable rental expenses are allowed only to the extent of rental income. Allocable rental expenses are deducted in three separate steps: first, the interest and taxes are deducted; second, utilities and maintenance expenses are deducted; and third, depreciation expense is deducted. For utilities, maintenance, and depreciation expenses to be deductible, there must be positive income following the deduction of items in the preceding step(s). In addition, the expenses, other than interest and taxes, are only deductible to the extent of that positive income. Expenses are allocated between the rental and personal days before the limits are applied. The IRS requires that the allocation be on the basis of the total days of rental use or personal use divided by the total days of use.
A passive activity is
a trade or business in which the taxpayer does not materially participate and most rental real estate activity
tax law classifies individual income into three categories
- 1) active income (e.g., wages, self-employment income, and salaries),
- (2) portfolio income (e.g., dividends and interest), and
- (3) passive income and losses (e.g., rental real estate income and loss, and income and loss passed through from limited partnerships and other ventures in which the taxpayer has minimal or no involvement).
passive losses cannot be used
to offset either active or portfolio income
ax credits derived from passive activities can only offset
income taxes attributable to passive income
unused passive losses and credits are carried over and may be used to
offset future passive income or taxes attributable to such income, respectively.
Under the passive loss rules, real estate rental activities are
pecifically defined as passive, even if the taxpayer actively manages the property and even if the activity is not conducted as a partnership.
Individual taxpayers may deduct up to $25,000 of rental property losses against other income, if
they are actively involved in the management of the property and their income does not exceed certain limits (100K, and then half deduction dollar for dollar up to $150K)
Taxpayers heavily involved in real estate rental activities may qualify
s having an active business rather than a passive activity
income and losses from qualified rental activities in active business are not subject to
passive loss limitations
For a real estate rental to be considered active
More than 50 percent of the individual’s personal service during the tax year is performed in real property trades or businesses, and
The individual performs more than 750 hours of service during the tax year in the real property trade or business in which he or she claims material participation.
Net Operating Loss (NOL)
To mitigate the effect of the annual accounting period, taxpayers are allowed to use a net loss resulting from operations, as a deduction from net income in past or future years. A carryback period of 2 years and a carryforward period of 20 years are allowed.
NOL generated after December 31, 2017 is limited
ercent of the current year’s taxable income
Compute the qualified business income (QBI) deduction
A deduction in the amount of 20 percent of the qualified business income, subject to certain limitations such as the taxable income limit, the wage limitation and the specified service business limitation. The limitations are computed before considering the QBI deduction.
QBI excludes the following
- Short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss
- Dividend income
- Interest income other than interest income that is properly allocable to a trade or business
- Commodity transaction income or foreign currency gain or loss
- Any item of income, gain, deduction, or loss relating to certain notional principal contracts
- Amounts received from an annuity that is not received in connection with the trade or business
- Any item of deduction or loss properly allocable to an amount described in any of the preceding items in this list (e.g., interest expense associated with investment income)
wage limitation
A limitation on the qualified business income deduction of 50 percent of wages.
wage limitations that apply to taxpayers that have total taxable income above
- 321400 MFJ
- 160725 MFS
- 160700 S/HOH/QW
are limited to
The wage limit is the greater of:
50 percent of the allocable share of W-2 wages with respect to the business (the “wage limit”) or
25 percent of the allocable share of W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified business property (the “wage and capital limit”)
qualified business property
The income attributed to individual taxpayers by a pass-through entity such as a sole proprietorship, partnership, or S corporation that excludes capital gains, most dividends, interest, and other nonbusiness income.
