Federal Taxation: Property Transactions

Question 1

3 Types of Assets. Briefly describe.

Answer 1

1. Ordinary Asset: Receivables, Inventory, Trade/business assets owned < 1 year
2. Section 1231 Asset: Ordinary asset owned > 1 year
3. Capital Asset: All other assets, personal/investment most common

Question 2

Formula for Realized Gain/Loss

Answer 2

Amount Realized
- Adjusted Basis
=Realized Gain/Loss

Question 3

What is included in “Amount Realized” for property transactions (4)?

Answer 3

Amount realized includes:
Cash received
FMV of property received
Liabilities assumed by the buyer
Less: Selling expenses

Question 4

What is included in the “Adjusted Basis” for property transactions (3)?

Answer 4

Acquisition basis equals cost of the property, and includes:
Any liabilities or expenses connected to acquisition
Less: Depreciation, amortization, and depletion
Plus: Capital improvements

Question 5

What are the 4 costs associated with placing an asset into service?

Answer 5

Transportation
Installation
Testing
Taxes

Question 6

Alternative valuation date

Answer 6

6 months after death

Question 7

2 Bases used for gifted property

Answer 7

Gain basis - donor’s adjusted basis

Loss basis - lower of adjusted basis or FMV

Question 8

2 General rules about gains and losses.

Answer 8

All realized gains and/or losses should be recognized unless specific rule excludes or defers.

Losses from sale of personal use assets are not recognized.

Question 9

5 Things you need to know for every property transaction

Answer 9

1. Realized Gain or Loss
2. Recognized Gain or loss
3. Character of the gain or loss (property type)
4. Holding period for retained asset
5. Basis in the retained asset

Question 10

4 Gift Basis Rules

Answer 10

1. Gain basis = Adj basis of the donor
2. Loss basis = FMV at date of gift or Adj basis of donor
3. Depreciable basis = Gain basis
4. Add adjustment for gift tax paid for appreciation
   Adj = (Unrealized appreciation)/(FMV at date of gift - Annual exclusion) x Gift tax paid

Question 11

Holding period for gifts and inheritances.

Answer 11

Gifts - If sold for gain, donor holding period carries over; if loss, holding period does not carry over.

Inheritance - always LT.

Question 12

What kind of loss is Section 1244 loss? It is not computed as what kind of loss?

Answer 12

Ordinary loss

Not computed as Net Capital Gain/Loss

Question 13

When are worthless securities deemed worthless?

Answer 13

Last day of tax year (December 31)

Question 14

What type of gain is eligible for preferential rates?

Answer 14

LTCG

Question 15

What is the maximum deduction for section 1244 losses?

Answer 15

$50,000 single

$100,000 married filing jointly

Question 16

To what extent are corporate capital losses deductible?

What is the carry back and carry forward timelines?

Answer 16

Only to the extent of capital gains.

Carry back 3 years; Carry forward 5 years

Question 17

How is net capital loss treated for carry back and/or carry forward?

Answer 17

As STCL

Question 18

To what extent are individual capital losses deductible?

Answer 18

The lower of $3,000 or the extent to which CL exceed CG’s.

[Is there any carry back/forward?]

Question 19

3 Rules for Section 1244 Stock

Answer 19

1. Gains treated as LTCG; Losses treated as Ordinary losses ($50K/$100K Max for single/MFJ)
2. Stock of domestic small business corporation: a) Receipts 50% receipts from sales rather than investment income, c) during previous 5 tax years
3. Seller had to be original holder for 1244 stock to apply (no inheritance, gift, resale)

Question 20

2 Types of Section 1231 Recapture.
What does each refer to?
How is it recharacterized?

Answer 20

1. 1245 Recapture - refers to depreciable realty; re-characterizes gains on personalty as ordinary income to the extent of accumulated depreciation.
2. 1250 Recapture - refers to depreciable real estate (buildings); re-characterizes accumulated accelerated depreciation in excess of straight-line depreciation as ordinary income. Depreciation in excess of SL depreciation is taxed at 25% rate for individuals, 20% rate for corporations.

Question 21

What does the look back provision state for Section 1231 Gains?

Answer 21

Any Section 1231 gains must be offset by net Section 1231 losses from the previous 5 years that have not been previously recaptured.

Question 22

For MACRS Personalty, what depreciation method is used, and how many years for what type of property classifications? (3)

Answer 22

1. 200% declining-balance method with half-year convention; Mid-quarter if >40% of assets placed in service last quarter of year.
2. 5 year property - trucks, autos, computers, machinery, equipment
3. 7 year property - office furniture and fixtures

Question 23

For MACRS Realty, what depreciation method is used, and how many years for what type of realty classifications? (4)

Answer 23

1. Straight-line depreciation with mid-month convention.
2. Residential property - 27.5 years
3. Commercial property - 39 years
4. Land is not depreciable; only buildings and/or improvements

Question 24

(3) Section 179 Rules:
- Type of asset
- Limits
- Affect on basis

Answer 24

1. Elect to expense certain tangible personalty in trade or business (Section 1231 Assets - Section 1245 Assets); not investment; can be new or used
2. 2 Rules: 1) Cannot exceed annual threshold-no carry forward, 2) Cannot exceed business income - excess can carry forward.
3. Basis is reduced for cost recovery purposes.

Question 25

Intangible Assets

• Classification
• Include (6)
• Type of depreciation and period

Answer 25

Intangible assets acquired, not created
Include: goodwill, franchise, trademark, covenant not to compete, patents, copyrights
Straight line depreciation over 15 years

Question 26

What is the recognized gain in a like-kind exchange?

Answer 26

The lesser of realized gain or boot.