Federal Taxation I: Property Transactions Flashcards
Capital Asset (3)
Any property other than Code Section 1231, such as:
- property for investment/personal use
- goodwill of a corporation
- self-created musical works
What properties are listed in Code Section 1231? (3)
Trade/business depreciable property owned greater than 1 yr:
- inventory
- accounts receivable
- depreciable properties or real estate used in trade/business
Categories of Assets (3)
- Ordinary
- Section 1231
- Capital
Ordinary Assets (3)
- Inventory & Accounts/Notes receivable
- depreciable property used in a trade/business owned less than 1 yr
- copyrights and musical, artistic, literary works held by the person who created them
When must Realized Gain or Loss be computed, and what is the formula?
any time there is a sale or disposition of property
= Amount Realized - Adjusted Basis
Compute Amount Realized (4)
Cash received
+ FMV of any property/services received
+ liabilities assumed by the buyer
- selling expenses
Compute Adjusted basis
Cost/acquisition basis (including liabilities/expenses connected w/ acquisition)
+ capital improvements
- depreciation, amortization and depletion
Special Basis for Gifts: If property is gifted to a taxpayer, the donee’s basis is…
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
Tax effects of basis for gifts (3)
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
Holding Period for gifts
Gain basis includes holding period of donor
Loss basis begins on date of the gift
Inheritance basis and holding period
Basis = FMV at date of death or alternate valuation date (6 months after date of death)
Holding period = long-term.
How are a C Corp’s net capital losses used?
Carried back three years and forward five. Can only be used to offset net capital gains.
Netting Process (3)
- Net all short-term capital gains and losses, and net all long-term capital gains and losses
- 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)
- Short-Term Net capital gain is taxed as ordinary income
Preferential Tax Rate for Net Capital Gain
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%.
Net Investment Income (NII) (3)
Comes from:
- interest, dividends, annuities, royalties (unless from business)
- other passive income
- gain from sale of assets generating such income
How much is the net investment income tax?
3.8% for taxpayers with modified AGI over $250K if married/joint or $200K if single.
Net Capital Gain Tax for straight-line depreciation on real estate.
Max = 25%
Net Capital Gain from “collectibles” (including gold/silver)
Max = 28%
Section 1244 Stock Gains/Losses
Gains are treated as regular long-term gains, but losses are treated as ordinary losses
Section 1231 Assets
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.
Recapture of Depreciation
reduces amount of gains eligible for Section 1231 treatment by recharacterizing the gain as ordinary income. (1245 and 1250)
Section 1245 Recapture
Recharacterizes gains on personalty as ordinary income to the extent of accumulated depreciation.
Section 1250 Recapture
Recapture of accumulated accelerated depreciation on buildings in excess of straight-line depreciation as ordinary income.
Section 1231 Netting (3)
- 1231 gains greater than 1231 losses: Net gain is a long-term capital gain.
- 1231 losses greater than 1231 gains. Loss is deductible as ordinary income
- 1231 gains must be offset by net 1231 losses from 5 preceding tax years that have not previously been recaptured
Sale of Business Property Form?
Form 4797 (includes depreciation recapture)
What is the tax form for Depreciation/Amortization?
Form 4562
Realty
Land and other assets affixed thereto (buildings) - Mid-Month
Personalty
any tangible asset that can be moved (not fixed to land) - Half-Year
Common Personalty Class lives
3 year - Race Horses
5 year - auto, truck, computer, other office equip
7 year - office furniture, agricultural and other machinery
*200% Declining Balance
Land Improvement Class Life
15 year - 150% Declining Balance
Residential Realty Class Life
(apartments, houses, duplexes, etc) 27.5 year straight-line
Nonresidential Realty Class Life
39 year straight-line
Bonus Depreciation (still being voted on for 2014)
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)
Section 179 Election
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)
Luxury Auto Limits
Autos are subject to an annual ceiling on recovery.
Listed Property
Assets, such as computers and vehicles that are commonly used for both business/personal purposes (not including cell phones)
Depletion
Natural Resources are subject to straight-line depletion
Amortization Rules (3)
- Intangible assets can be amortized on a SL basis over 15-yr period
- Goodwill, know-how, govt. licenses, franchises, trademarks, etc.
- Other assets may qualify if acquired in connection with acquisition of trade/business.
Organization/Start-Up Expenses
$5,000 may be deducted. Other expenses must be capitalized/amortized over 180 months.
Like-Kind Exchange Tax Form
Form 8824
Like-Kind Exchange Gains/Losses
Losses are never recognized. Recognized gain is the lesser of realized gain or boot received
Like-kind property
has same general character as property given up (only business and investment property qualifies)
What is “Boot”?
nonqualifying property received by the taxpayer (includes cash, mortgage relief, etc)
Basis of Like-Kind Property Calculation
FMV of property received
- Postponed gain
+ Postponed Loss
Involuntary Conversion
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)
Wash sale
sale that results from purchase of “substantially identical” stock/securities within a 30-day window. Losses are not recognized… does not apply to gains.
Related Party (for loss deduction)
family members (brother, sister, spouse, ancestors, descendants, controlled entities, beneficiaries of estates and trusts) - NOT INLAWS
Sale of Principal Residence
Exclusion of Gains can be used once every 2 years. Up to $250K for single, $500K for married.
Section 1244 Stock
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
