Gains and Losses from Sales, Exchanges, and other Dispositions

Question 1

Are taxpayers required to recognize a gain or loss on real or personal property due to a change in its value during the tax year?

Answer 1

No

Question 2

What is the formula for calculating a realized gain or loss?

Answer 2

Amount realized - adjusted basis = realized gain or loss

Question 3

How do you calculate the amount realized?

Answer 3

Money received
+ FMV of property received
+ recourse liability of taxpayer discharged as result of the disposition
+ nonrecourse liability to which the property is subject
= Amount Realized

Question 4

What is adjusted basis?

Answer 4

Original basis
+ cost of any improvements made to the property
- depreciation allowed
= Adjusted basis

Question 5

How do you determine what basis applies to gifts?

Answer 5

1. If the donor’s basis is less than FMV, then donee’s basis is the same
2. If on disposition, the amount realized is greater than donor’s adjusted basis, then the same
3. If the amount realized is greater than FMV at time of the gift, there is no gain or loss from the disposition

Question 6

If property is inherited, what basis does the donee get?

Answer 6

FMV at date of decedent’s death (“stepped up” basis)

Question 7

What is the basis for a purchase?

Answer 7

Cost

Question 8

What is the basis for an exchange?

Answer 8

FMV of property received

Question 9

When are gains and losses taken into account for computing gross income?

Answer 9

When they are “recognized”

Question 10

What losses are not recognized?

Answer 10

1. Disposition of personal assets
2. Transactions between related taxpayers
3. Wash sales
4. like-kind exchanges (but not for securities)
5. involuntary conversions (e.g. thefts, seizures, etc.)

Question 11

What is the difference between ordinary and capital assets?

Answer 11

Generally, everything is a capital asset, unless expressly excluded

Question 12

What are the five common categories of noncapital assets?

Answer 12

1. Inventory for sale in ordinary course
2. Depreciable or real property used in business
3. Patents, copyrights, etc.
4. Accounts or notes receivable received in the ordinary course
5. Supplies used in ordinary course

Question 13

What is the holding period for a capital asset, and why does it matter?

Answer 13

It is the period of time held by a taxpayer, and it matters because capital assets may be taxed differently if short-term (one year or less) or long-term (more than one year)

Question 14

What is the maximum rate for long-term capital gains?

Answer 14

20%