Chapter 4 Section 1: Property Taxation Flashcards
Define Real Property
Land and building
Define Personal Property
Machinery, equipment, and cars
Define Capital Assets
Property (real and personal) held by the taxpayer
Define Noncapital Assets
Business use assets
If works of art were purchased, are they capital or non?
What if they are held by the original artist?
Purchased: Capital
Real: Noncapital (because it’s inventory)
What is the basic formula for calculating capital gain or loss?
Amount Realized
- Adjusted Basis of Asset Sold
What is the amount realized for:
- Cash
- Assumption of debt by buyer
- Property received
- Services received
- actual amount (boot)\
- excess = boot
- FMV
- FMV
What is the adjusted basis of the asset sold when it is purchased property?
Generally, the cost
Increase for improvements and decrease for depreciation
What is the adjusted basis of the asset sold when it is gifted property?
What is the exception?
Generally the donor’s rollover cost.
Exception: When the FMV is lower than the cost, use the lower of the two.
Explain how basis is calculated for gifted property when sold higher than cost, lower than FMV, or between them?
If FMV is higher, always use cost.
If FMV is lower and you sell higher than cost, use cost to calculate gain
If FMV is lower and you sell lower than that, use FMV to calculate loss
If FMV is lower but you sell between FMV and cost, there is no G/L
What is the adjusted basis of the asset sold when it is inherited property?
Step up (down) to FMV
What is the holding period for gifted assets?
It assumes the donor’s holding period
What is the holding period for inherited assets?
Automatic long-term
What date do you determine FMV at for inherited property?
General: date of death
Alternate: earlier of distribution date or 6 months after sale
What gain is always taxable?
Gain to the extent of boot (cash or COD)
What are the items on which realized gain is not recognized?
HIDE IT
Homeowner's Exclusion Involuntary Conversion Divorce Property Settlement Exchange of Like Kind (business) Installment Sale Treasury Capital and Stock
What is the homeowner’s exclusion?
When you sell your house, you can exclude 500,000 of the gain (married - 250,000 single)
What is the age requirement on the homeowner’s exclusion?
Do you have to rollover to another house?
How many times can you use it?
There isn’t one
No
As many as you want - it’s renewable
What is the involuntary conversion exclusion?
You don’t have to include the gain on involuntary conversions up to the amount you reinvest in whatever was converted. You do recognize what you don’t reinvest.
You still recognize losses
For the involuntary conversion exclusion, how soon do you need to reinvest personal property?
Business?
2 years from year-end
3 years from year-end
What is excluded from the like-kind business/investment assets exclusion?
Inventory, stock, securities, partnership interests, real property in different countries
How do you calculate gain for installment sales?
You recognize profit when cash is realized.
GP = sale - COGS
GP % = HP/sales price
Earned rev (taxable inc) = cash collected x GP %
What treasury stock and capital stock transactions are excluded from capital gain taxation for corporations?
Sales of stock by corp
Repurchase of stock by corp
Reissue of stock
What losses are nondeductible?
WRAP
Wash sale loss
Related party transaction
Personal loss
Define wash sale
When a security is sold for a loss and is repurchased within 30 days before or after the sale date
What if a wash sale results in a gain?
Pay capital gains tax and use the new purchase price as the basis
What is the less obvious related party?
Entities that are more than 50% owned by the same entity
Are in-laws related parties?
No
What are the basis rules for related party transactions?
Same as gift tax rules
What is the holding period for related party transactions?
Start with the new owner’s period of ownership
Explain the personal loss exclusion
No deduction is allowed for the loss on a nonbusiness disposal or loss. You could maybe take an itemized deduction for casualty and theft.
What should we know about the tax rate for individual capital gain and losses?
Long term - ranges from 20-0%
Short term - same as ordinary income
What is the maximum deduction for capital loss for individuals?
3,000 can be deducted from any type of income.
What do you do with excess net capital loss for individuals?
Carry forward forever
What should we know about the tax rate for corporate capital gain and losses?
Gains - treat like ordinary income
Loss - deduct against capital gain only.
What do you do with excess net capital loss for corporations?
Back three, forward five
What do you do with salvage value in MACRS depreciation?
Ignore it
What is the half-year convention?
What is it used for?
It applies to personal property depreciation, and you treat it like it was placed in service or disposed of midway through the year.
Machinery and equipment
What is the mid-quarter convention?
What is it used for?
If more than 40% of depreciable personal property is placed in service in the last quarter of the year, use this.
Machinery and equipment
What life do you depreciate residential rental property over?
27.5 years
What life do you depreciate nonresidential real property over?
39 years
What is the mid-month convention?
What is it used for?
One half month is taken int he month the property is placed in service and for which the property is disposed of.
Real estate
Explain Section 179 Expense
Each year a taxpayer may deduct, as an expense in lieu of depreciation, a fixed amount of depreciable property. The limit is $25,000 of personal property reduced by the amount of property acquired over $200,000.
Can you use Section 179 to create or increase a loss?
No
What’s the 179 limit for an SUV?
$25,000
What is the deduction for percentage depletion?
Limited to 50% of taxable income from the well or mine.
How do you do amortization of intangibles for tax? How is it different from GAAP?
Straight line over 15 years
GAAP tests for impairment
What are 1231 assets?
Business use assets
How are gains treated under 1231?
As long-term capital gains
How are losses treated under 1231?
As ordinary
What’s the general rule for the cost of materials and supplies that can be expensed?
$200 or less.
What do you do with indirect costs for improvements?
Capitalize them
Explain the de minimis rule and what you need to do for it.
It’s an expense election
Write it and give either a certain dollar amount or life limit.
The max is $5,000 with a financial statement, $500 without
