Chapter 7 - property and special property tax transactions

Question 1

Like Kind exchanges (1031)

Answer 1

• Old basis
• • gain recognized:
    
    • lessor of:
      
      • boot received
      • gain realized (FMV of new + boot received - basis of relinquished)
• • boot received:
    
    • cash received + unlike prop received + liab. passed on to other party
• • loss realized (never recognized)
• = new basis

Question 2

Ordinary income assets (current assets of business)

Answer 2

• assets that were acquired or produced with the intention of being sold in the ordinary course of business
  
  • inventory
  • receivables arising from sales
  • self created artistic work
    
    • no special tax rules or limits.

Question 3

Section 1231 assets (non-current business assets)

Answer 3

• depreciable and amortizable property
• land used in business, PP&E
• if held over 1 year:
  
  • net loss is ordinary income
  • net gain is LTCG
    
    • prior depreciation is recaptured as ordinary income on tangible personal property
• If held = 1 year - ordinary

Question 4

Holding periods

Answer 4

• Inherited assets - sales are always classified as LT
• Non-business bad debts - write offs are always classified as STCL

Question 5

Depreciation Recapture

Answer 5

• section 1245 tangible personal property:
  
  • gains be reported as ordinary income to the extent of prior dep.
• section 1250 real property
  
  • gains be reported as ordinary income to the extent of additional depreciation
    
    • held = 1 year, all depreciation is ordinary
    • held >/= 1 year, depreciation taken - straight line dep. is ordinary income.
• section 291: when c corp sells 1250
  
  • ordinary gains is (dep. taken - straight line) + (20% of straight line).

Question 6

who must follow UNICAP

Answer 6

• produces real or tangible personal property
• average annual gross receipts for past 3 years of more than $10M

Question 7

capitalized costs include

Answer 7

• pre-production:
  
  • design, bidding exp, purchasing
• production costs:
  
  • direct materials, labor & production, indirect production costs (factory overhead)
• pre- sale costs:
  
  • storage, handling, excise tax (if levied before sale)
• Capitalized as inventory:
  
  • DM
  • DL
  • factory overhead
• period expenses:
  
  • selling
  • general
  • administrative
  • R&D

Question 8

UNICAP: acquisition or production costs

Answer 8

• de minimus annual expense election:
  
  • $5000 per invoice or $5000 per item.

Question 9

UNICAP: Improvements (BAR)

Answer 9

must capitalize if for:

• Betterment:
• Adaptation: property is now a different use that is inconsistent with taxpayers intended ordinary use of property
• Restoration: restores basis, replaces part or a major component of the property.

Question 10

Inheritance (basis and sale)

Answer 10

• Usually FMV at death
• but if AVD is chosen:
  
  • earlier of:
    
    • date it was transferred or
    • six months after death
• subsequent sale is always treated as LT

Question 11

Gifts (basis)

Answer 11

• if value appreciates:
  
  • carryover basis and carryover holding period
• if value depreciates:
  
  • dual basis rule:
    
    • ex - basis: $10, FMV: $6
      
      • selling price $12 , gain $2
      • selling price $3, loss $3
      • selling price $8 (between FMV and basis) no G/L

Question 12

Wash Sales

Answer 12

• losses from wash sales are not deductible. if an asset that has been sold at a loss is repurchased within 30 days of the sale, the loss may not be deducted, but is added to the basis of the repurchased asset.
  
  • gains are taxable, losses are not deductible.

Question 13

Related party sales

Answer 13

• sales between:
  
  • husband and wife
  • sister and brother
  • parent to child
  • grandparent to grandchild
  • ancestor and descendant
  • majority shareholder and corp.
  • majority partner and partnership
    
    • not uncle, aunt, nephews, in- laws
• gains are fully taxable
• losses are treated as dual basis

Question 14

gains from Involuntary conversions

Answer 14

• gain may be deferred if the property is replaced within the statutory time limit. the time is measured from the calendar year the taxpayer received the proceeds and equals:
  
  • 2 years - destruction or theft of property resulting in insurance recovery
  • 3 years - government condemnation or eminent domain award
  • 4 years - conversion in connection with a declared federal disaster

Question 15

Gain on sale of personal residence

Answer 15

• if used as principle resident for 2 of 5 past years:
  
  • can deduct $250K of gain (500K for MFJ)
• if dont meet 2 year requirement but forced to sell due to change in place of employement (50 + miles) health or other unforseen circumstance then ok to take (pro rata amount)

Question 16

Installment Sales Method

Answer 16

• applies to gains (not losses from the disposition of property where at least one payment is to be received after the year of sale. A portion of the gain is reported as each payment is received.
  
  • GP% x cash collected = installment sale income
    
    • GP% = (selling price-basis)/(contract price)