Chapter 8 - Property Dispositions. Flashcards
Define Abandonment Loss
The unrecovered basis in an abandoned asset. Abandonment losses with respect to business assets are ordinary deductions.
Define Affiliated Corporation
For purposes of the tax rules governing worthless securities, any 80% or more controlled domestic subsidiary that has always derived more than 90% of annual gross receipts from the conduct of an active business.
Define Amount Realized
The sum of any money plus the fair market value of any property raised by a seller on the sale or exchange of property.
Define Capital Asset
Any asset that does not fall into one of the eight statutory categories of noncapital assets. Most business assets (accounts receivable, supplies, inventories, tangible personalty, realty, and purchased intangibles) are noncapital assets.
Define Capital Gain or Loss
Gain or loss realized on the sale or exchange of a capital asset. Capital gain may be eligible for a preferential tax rate.
Define Depreciation Recapture
Recapture computed with reference to depreciation or amortization deductions claimed with respect to property surrendered in a sale or exchange.
Define Gross Profit Percentage
The ratio of gain realized to total contract price in an installment sale.
Define Installment Sale Method
A method of accounting for gains realized on the sale of property when some part of the amount realized consists of the buyer’s note. Under the installment sale method, gain recognition is linked to the seller’s receipt of cash over the life of the note. The seller calculates the gain recognized in the year of the sale and each subsequent year by multiplying the cash received during the year by a gross profit percentage.
Define Net Capital Loss
The excess of current year capital losses over capital gains.
Define Nonrecaptured Section 1231 Loss
A net Section 1231 loss recognized in any of the five preceding taxable years that has not caused recharacterization of Section 1231 gain as ordinary income
Define Nonrecourse Debt
A debt secured by specific collateral for which the debtor is not personally liable.
Define Ordinary Gain or Loss
Any realized gain or loss that is not a capital gain or loss.
Define Realized Gain or Loss
The positive or negative difference between the amount realized on the disposition of property and the adjusted basis of the property.
Define Recapture
Recharacterization of Section 1231 or capital gain as ordinary income.
Define Recognized Gain or Loss
Realized gain or loss taken into account for tax purposes in the current year.
Define Recourse Debt
A debt for which the debtor is personally liable.
Define Section 1231 Asset
Real or depreciable property used in a trade or business (including rental real estate) and intangible business assets subject to amortization held by the owner for more than one year.
Define Section 1245 Recapture
Full recapture of depreciation or amortization allowed for tangible personalty or purchased intangibles.
Define Section 1250 Recapture
Recapture of excess accelerated depreciation over straight-line depreciation allowed for buildings placed in service before 1987.
Define Seller-Financed Sale
A sale transaction in which the seller accepts the purchaser’s debt obligation as part of the sale price.
Define 20 Percent Recapture
Twenty percent of the excess of Section 1245 recapture over 1250 recapture for buildings owned by corporations.
(Section 1245 Recapture - Section 1250 Recapture) * .2 = 20% recapture.
or
In cases where §1250 recapture doesn’t apply it is just 20% of the §1245 recapture
How is a realized gain or loss computed?
Amount realized on disposition
- Adjusted tax basis of property
_____________________________
Realized gain (or loss)
What principle of accounting is reflected in the computation of realized gains or losses?
Realization principle (Increases and decreases in value of assets are not account for as income)
What are the two ways owners can dispose of property?
Sell
Exchange for other property.