Federal Taxation-Property Transactions (12-22%)

Question 1

What is considered an ordinary asset?

Answer 1

• inventory
• accounts receivable
• notes receivable

Question 2

What is considered Section 1231 assets?

Answer 2

depreciable property used in a trade/business (owned for more than 1 year)

Question 3

What is considered a capital asset?

Answer 3

property held for investment use/personal use

Question 4

What type of asset is a property gift/inheritance considered? how is a gift’s basis determined?

Answer 4

capital asset

gain basis = adjusted basis of donor (holding period includes donor’s holding period)

loss basis = lower of FMV at date of gift, or adjusted basis of donor (holding period begins at date gift was received)

Question 5

How is an inheritance basis determined?

Answer 5

FMV at date of death, OR,
if alternate valuation date is used, FMV at 6 months after DOD.
(Holding period always considered long-term)

Question 6

What type of transaction is no gain recognized unless boot is received?

Answer 6

like-kind exchange
recognized gain = lesser of realized gain or boot received

never losses with a like-kind exchange

Question 7

What qualifies/disqualifies for a like-kind exchange?

Answer 7

qualified:

• business property
• investment property
• all realty/real property (real-estate) (building/land)

disqualified:

• inventory
• stocks
• bonds
• CD’s
• partnership interests

Question 8

What is the netting process for capital asset gains/losses?

Answer 8

1) net ST gains and losses together
2) net LT gains and losses together
3) set ST G/L against the LT G/L
4) sum takes the character of whatever was larger

Question 9

How are capital asset gains/losses taxed?

Answer 9

net ST taxed as ordinary income (individuals & corporations)

net LT taxed as ordinary income (corporations), but separate tax rate (individuals)

If ST/LT G/L’s are negative, then an individual can deduct this net capital loss from ordinary income up to $3,000

CB 3 years, CFWD 5 years. can only be used to offset capital gains, cannot create a NOL not can reduce taxable income

Question 10

What are installment sales? How is the amount of annual gain determined?

Answer 10

sell capital asset and receive at least one payment after the year in which sale took place

annual gain =
(total gain/contract price) x annual payment

• each payment is multiplied by the gain percentage of the total sales amount
• accumulated depreciation decreases basis/increases gain - affects results

Question 11

A related party for capital assets includes who?

Answer 11

• direct family line (grandparents down to children, extended family/in laws not considered related
• corporation/partnership where more than 50% of stock/capital interest owned by taxpayer (directly/indirectly)

Question 12

How do you compute indirect ownership in a corporation?

Answer 12

one owns percentage in Corp A, and Corp A owns Corp B, then you multiply percentage they own in A by the percentage A owns in B

ex: own 40% in A, and A owns 50% in B. 40% x 50%, gives you 20%. you indirectly own 20% in B via ownership in A.

Question 13

How do you compute indirect ownership via relation?

Answer 13

person has constructive ownership of corporation if certain family members own shares in corporation

your father owns 10% in A, your mother owns 20% in A, then you own 30% in A.

Question 14

What are rules for imputed interest on loans to related parties?

Answer 14

minimum amount of interest should be charged, unless loan is less than $10,000 it is not subject

usually based on AFR (applicable federal rate)

Question 15

How does mid-year convention depreciation work?

Answer 15

asset treated as placed into service at the mid-year point, regardless of when purchased

exception: when more than 40% of assets placed into service that year were put into service in Q4. when this happens, it is mid-quarter convention.

Question 16

How does mid-quarter convention depreciation work?

Answer 16

asset treated as placed in service at the midpoint of the quarter in which the assets is put into service, regardless of which quarter.

*if this applies (when more than 40% of assets placed into service that year were put into service in Q4), then ALL assets placed into service that year apply to this convention.

Question 17

How does mid-month convention depreciation work?

Answer 17

asset treated as placed in service at the midpoint of the month, regardless of when purchased in that month (for real property)

Question 18

What is basic idea of depreciation recapture for 1231, 1245, 1250 assets?

Answer 18

business has been taking depreciation on the asset, which lowers the basis in the asset. when asset is sold (or involuntarily disposed of), depreciation is “recaptured” by classifying all or part of the gain on the sale as income to the business (involves complicated rules)

Question 19

What happens when 1231 assets are sold?

Answer 19

gains and losses netted together

if net gain, taxed as a LT capital gain
if net loss, taxed as ordinary loss

Question 20

What are the 2 types of recapture under the umbrella of 1231 assets?

Answer 20

section 1245 = personalty (personal property)
gain up to amount of accumulated depreciation taxed as ordinary income, remainder would be a 1231 gain (LT capital gain)

section 1250 = realty (real property)
gain on depreciation in excess of straight line (SL) as ordinary income, remainder would be a 1231 gain (LT capital gain)

Question 21

What is the 1231 lookback provision?

Answer 21

1231 gains must be offset by net 1231 losses going back 5 years that have not previously been recaptured.

any absorbed, treated as ordinary income, remainder would be a 1231 gain (LT capital gain)

Question 22

How are startup/organizational costs accounted for?

Answer 22

$5,000 can be expensed immediately, remainder if amortized over 15 years

cap of $50,000, anything over reduces the allowed $5,000 dollar for dollar.

ex: $54,000 in startup costs, $1,000 expensed (54,000-50,000=4,000; 5,000-4,000=1,000), remainder $53,000 amortized

Question 23

What is the formula for calculating depletion?

Answer 23

(adj basis in property/estimated units of mineral) x mineral units sold

Question 24

What is subject to gift tax? who is tax placed on?

Answer 24

when you give away property while alive (cash, property, debt that is forgiven to a family member/friend)

gift tax is placed on the giver of the gift

*if transferred as a result of death, subject to estate taxes

Question 25

How do you determine the value of the gift? Where is the gift tax reported?

Answer 25

value of gift is FMV of property

gift tax is reported on Form 709

Question 26

What is the exclusion for gift taxes?

Answer 26

$15,000 per recipient (10 gifts x $15,000 or 100 gifts x $15,000) - tax free as long as to different recipients

couples can elect gift-splitting, which means couples can give gifts of double annual exclusion.

Question 27

When is form 709 required to be filed?

Answer 27

1) any time a gift larger than $15,000 annual exclusion

2) when couple elects gift-splitting

Question 28

What types of gifts have unlimited exclusion?

Answer 28

• education (tuition, not room and board) - must be paid directly to school
• medical - must be paid directly to medical provider
• marital - must be married at time of gift
• charitable contribution - must be paid directly to charitable organization