Gains and Losses from Property Dispositions

Question 1

What are the three steps for calculating gains and losses from property dispositions?

Answer 1

1. Realization
2. Recognition
3. Classification

Question 2

How do you calculate whether there has been a realized gain or a realized loss?

Answer 2

You subtract the adjusted basis from the amount realized.

Question 3

How do you calculate the amount realized?

Answer 3

You add cash received, fair market value of property received, and debt relief.

Question 4

How do you calculate the adjusted basis?

Answer 4

You add the original basis and the cost of permanent improvements, and then subtract the depreciation allowed.

Question 5

How do you calculate the original basis?

Answer 5

Generally, it is the cost incurred to acquire a property, UNLESS

• the property was acquired as compensation, in which case you use the fair market value at receipt;
• the property was acquired by gift, in which case you use the donor’s basis;
• the property was acquired by a gift AND it is now worth less than when the donor acquired it, in which case you use the fair market value at the time of the gift;
• the property was acquired from a decedent, in which case you use the fair market value on the date of the decedent’s death.

Question 6

What do you do if you have a realized gain?

Answer 6

You ask if the gain is recognized.

Question 7

When will a realized gain be recognized?

Answer 7

Always, UNLESS

• the property was gained by like-kind exchange of real property OR
• the property was gained from an involuntary conversion of property, as long as the taxpayer uses any conversion proceeds to purchase replacement property within a short period of time OR
  
  • Your house is imminent domained, you use the just compensation to buy a new one within a short period of time
• the property was gained by transfer to a spouse OR by transfer to a former spouse incident to a divorce.

Question 8

If the realized gain is recognized, what is the next step?

Answer 8

Determine the realized, recognized gain’s character.

Question 9

How can a realized, recognized gain be characterized?

Answer 9

As a long-term capital gain, if

1. the gain is from the sale or exchange
2. of a capital asset (not related to the taxpayer’s trade or business and not a self-created intangible AND
3. the gain is held for more than one year (tacking allowed)

Question 10

What are the ramifications of a long-term capital gain?

Answer 10

Depending on your tax bracket, it will either be taxed at only 0%, 15%, or 20%.

Question 11

What do you do if you have a realized loss?

Answer 11

Ask if the loss is recognized.

Question 12

When will a realized loss be recognized?

Answer 12

• If it is a business loss (above-the-line exemption)
• If it is an investment loss (itemized, UNLESS related to real property, in which case above-the-line) OR
• If it is a casualty and theft loss (itemized)
  
  • UNLESS it is a like-kind exchange of real property OR a transfer to spouse or former spouse upon divorce.

Question 13

How can a realized, recognized loss be characterized?

Answer 13

They are only deductible to the extent of capital gains PLUS up to $3,000, though any net capital loss carries over to the next taxable year.