Federal Taxation I: Property Transactions

Question 1

Capital Asset (3)

Answer 1

Any property other than Code Section 1231, such as:

1. property for investment/personal use
2. goodwill of a corporation
3. self-created musical works

Question 2

What properties are listed in Code Section 1231? (3)

Answer 2

Trade/business depreciable property owned greater than 1 yr:

1. inventory
2. accounts receivable
3. depreciable properties or real estate used in trade/business

Question 3

Categories of Assets (3)

Answer 3

1. Ordinary
2. Section 1231
3. Capital

Question 4

Ordinary Assets (3)

Answer 4

1. Inventory & Accounts/Notes receivable
2. depreciable property used in a trade/business owned less than 1 yr
3. copyrights and musical, artistic, literary works held by the person who created them

Question 5

When must Realized Gain or Loss be computed, and what is the formula?

Answer 5

any time there is a sale or disposition of property

= Amount Realized - Adjusted Basis

Question 6

Compute Amount Realized (4)

Answer 6

Cash received

+ FMV of any property/services received

+ liabilities assumed by the buyer

• selling expenses

Question 7

Compute Adjusted basis

Answer 7

Cost/acquisition basis (including liabilities/expenses connected w/ acquisition)

+ capital improvements

• depreciation, amortization and depletion

Question 8

Special Basis for Gifts: If property is gifted to a taxpayer, the donee’s basis is…

Answer 8

Gain/depreciable basis = adjusted basis of donor

Loss basis = lower of FMV at date of gift or adjusted basis of donor

• basis is increased by any gift tax paid by the donor due to appreciation in the property

Question 9

Tax effects of basis for gifts (3)

Answer 9

GAIN: if donee sells property for more than gain basis

LOSS: if donee sells property for less than loss basis

NO GAIN/LOSS: if property is sold by donee for amount in-between gain/loss basis

Question 10

Holding Period for gifts

Answer 10

Gain basis includes holding period of donor

Loss basis begins on date of the gift

Question 11

Inheritance basis and holding period

Answer 11

Basis = FMV at date of death or alternate valuation date (6 months after date of death)

Holding period = long-term.

Question 12

How are a C Corp’s net capital losses used?

Answer 12

Carried back three years and forward five. Can only be used to offset net capital gains.

Question 13

Netting Process (3)

Answer 13

1. Net all short-term capital gains and losses, and net all long-term capital gains and losses
2. If the combination of net s/t and net l/t gains/losses is negative, then individuals can deduct this “net capital loss” up to $3,000 per year. (excess can be carried forward, not back)
3. Short-Term Net capital gain is taxed as ordinary income

Question 14

Preferential Tax Rate for Net Capital Gain

Answer 14

Net capital gain is taxed at 20% for people in the 39.6% bracket, 0% if taxpayer is at 15% or lower. For everyone else it is taxed at 15%.

Question 15

Net Investment Income (NII) (3)

Answer 15

Comes from:

1. interest, dividends, annuities, royalties (unless from business)
2. other passive income
3. gain from sale of assets generating such income

Question 16

How much is the net investment income tax?

Answer 16

3.8% for taxpayers with modified AGI over $250K if married/joint or $200K if single.

Question 17

Net Capital Gain Tax for straight-line depreciation on real estate.

Answer 17

Max = 25%

Question 18

Net Capital Gain from “collectibles” (including gold/silver)

Answer 18

Max = 28%

Question 19

Section 1244 Stock Gains/Losses

Answer 19

Gains are treated as regular long-term gains, but losses are treated as ordinary losses

Question 20

Section 1231 Assets

Answer 20

Assets held more than 1 yr and used in business. Include realty and depreciable property, but exclude capital assets, inventory, A/R, copyrights and govt publications.

Question 21

Recapture of Depreciation

Answer 21

reduces amount of gains eligible for Section 1231 treatment by recharacterizing the gain as ordinary income. (1245 and 1250)

Question 22

Section 1245 Recapture

Answer 22

Recharacterizes gains on personalty as ordinary income to the extent of accumulated depreciation.

Question 23

Section 1250 Recapture

Answer 23

Recapture of accumulated accelerated depreciation on buildings in excess of straight-line depreciation as ordinary income.

Question 24

Section 1231 Netting (3)

Answer 24

1. 1231 gains greater than 1231 losses: Net gain is a long-term capital gain.
2. 1231 losses greater than 1231 gains. Loss is deductible as ordinary income
3. 1231 gains must be offset by net 1231 losses from 5 preceding tax years that have not previously been recaptured

Question 25

Sale of Business Property Form?

Answer 25

Form 4797 (includes depreciation recapture)

Question 26

What is the tax form for Depreciation/Amortization?

Answer 26

Form 4562

Question 27

Realty

Answer 27

Land and other assets affixed thereto (buildings) - Mid-Month

Question 28

Personalty

Answer 28

any tangible asset that can be moved (not fixed to land) - Half-Year

Question 29

Common Personalty Class lives

Answer 29

3 year - Race Horses 5 year - auto, truck, computer, other office equip 7 year - office furniture, agricultural and other machinery *200% Declining Balance

Question 30

Land Improvement Class Life

Answer 30

15 year - 150% Declining Balance

Question 31

Residential Realty Class Life

Answer 31

(apartments, houses, duplexes, etc) 27.5 year straight-line

Question 32

Nonresidential Realty Class Life

Answer 32

39 year straight-line

Question 33

Bonus Depreciation (still being voted on for 2014)

Answer 33

2011 - 100%, 2012, 2013 - 50% for new qualifying property (new tangible property with a recovery period of less than or equal to 20 years, computer software and certain leasehold improvements)

Question 34

Section 179 Election

Answer 34

expense a limited amount of tangible personalty if used in trade activity. Cannot exceed business income. (or $500,000 in 2013, $25,000 in 2014)

Question 35

Luxury Auto Limits

Answer 35

Autos are subject to an annual ceiling on recovery.

Question 36

Listed Property

Answer 36

Assets, such as computers and vehicles that are commonly used for both business/personal purposes (not including cell phones)

Question 37

Depletion

Answer 37

Natural Resources are subject to straight-line depletion

Question 38

Amortization Rules (3)

Answer 38

1. Intangible assets can be amortized on a SL basis over 15-yr period 2. Goodwill, know-how, govt. licenses, franchises, trademarks, etc. 3. Other assets may qualify if acquired in connection with acquisition of trade/business.

Question 39

Organization/Start-Up Expenses

Answer 39

$5,000 may be deducted. Other expenses must be capitalized/amortized over 180 months.

Question 40

Like-Kind Exchange Tax Form

Answer 40

Form 8824

Question 41

Like-Kind Exchange Gains/Losses

Answer 41

Losses are never recognized. Recognized gain is the lesser of realized gain or boot received

Question 42

Like-kind property

Answer 42

has same general character as property given up (only business and investment property qualifies)

Question 43

What is "Boot"?

Answer 43

nonqualifying property received by the taxpayer (includes cash, mortgage relief, etc)

Question 44

Basis of Like-Kind Property Calculation

Answer 44

FMV of property received - Postponed gain + Postponed Loss

Question 45

Involuntary Conversion

Answer 45

Result of a casualty, theft or condemnation. Involuntary conversion of property resulting in a realized gain is eligible for deferral - does not apply to losses (not mandatory)

Question 46

Wash sale

Answer 46

sale that results from purchase of "substantially identical" stock/securities within a 30-day window. Losses are not recognized... does not apply to gains.

Question 47

Related Party (for loss deduction)

Answer 47

family members (brother, sister, spouse, ancestors, descendants, controlled entities, beneficiaries of estates and trusts) - NOT INLAWS

Question 48

Sale of Principal Residence

Answer 48

Exclusion of Gains can be used once every 2 years. Up to $250K for single, $500K for married.

Question 49

Section 1244 Stock

Answer 49

stock of a domestic small business with capital receipts less than $1M at the time the stock is issued. 50% of gross receipts have to be generated from sources other than investment over the previous 5 years