Gains and Losses on Disposition of Property

Question 1

What is realization?

Answer 1

The sale, disposition, or exchange of an asset: specific instance in time.

Question 2

What is recognition?

Answer 2

Reporting the gain/loss on tax reports

Question 3

What is the general rule for realization/recognition?

Answer 3

Unless a specific statutory or common law exception applies, whenever a gain is realized, it must also be recognized for tax purposes.

Question 4

What is the basic sale formula?

Answer 4

Amount Realized-Adjusted Basis = Gain (or Loss)

Question 5

LK owns a small property with a cost basis of $700,000. In order to cover bills, he sells the property. Buyer pays $600,000 cash and takes over the $500,000 mortgages. How much gain will LK realize and recognize on the sale of his business property?

Answer 5

1,100,000-700,000=400,000 Capital gain.

Question 6

What is the amount realized consist of?

Answer 6

Amount realized includes money received, plus fair market value of property or services received, plus mortgages or liabilities wo which the property sold is subject or which the buyer assumed.

Question 7

What is the Cost Basis Rule?

Answer 7

A taxpayer’s basis in property acquired by purchase is generally the cost of the property, including money paid and borrowing incurred in connection with the purchase.

Question 8

Jay buys a new home, putting a down payment of 500,000 and get a 2.5million mortgage. What is the basis for his new home?

Answer 8

3 million.

Question 9

What is the rule for Divorce property settlements regarding cost basis?

Answer 9

A transfer of property between spouses or “ex-spouses” that is incident to divorce is not a taxable event to either party. The spouse receiving the property will have the same basis that the donor spouse had. This is known as a “substituted basis”, basically stepping into the shoes of donor.

Question 10

As part of their divorce agreement, Brad agrees to transfer to Jennifer property purchased for 500G now valued at 3 million. Must Brad recognize any income upon transfer of the property?
Can Jennifer recognize any taxable income?
What’s Jennifer’s basis?
What’s her gain if she sells it?

Answer 10

No.
No
500,000
3,000,000-500,000=2,500,000

Question 11

What is the tax basis rule for gifts?

Answer 11

The recipient of a gift takes the donor’s basis. This is also known as a substitute basis rule.

Question 12

D purchased stocks for 10G now has a value for 100G. He gifts the stock to his son, who sells it for 100G. What’s her taxable gain?

Answer 12

100,000-10,000=90,000 capital gain.

Question 13

What is the tax basis rule for inherited property?

Answer 13

The recipient’s basis in inherited property is the fair market value of the property at the date of the decedent’s death (or upon executor’s election, the date 6 months following decedent’s death)

Question 14

D dies and leaves his son the same stock, bought for 10G, now valued 100G (at time of death). What’s the basis?

Answer 14

$0.00

Question 15

What is the rule for Like-Kind exchanges?

Answer 15

No gain or loss is recognized when a taxpayer exchanges property held for productive use in a business or for investment for a like-kind property also held for productive use in business or for investment. (not for stocks/bonds. usually real estate)

Question 16

B owns an apartment in Seattle, that he holds for investment purposes only, with basis of 100G and valued at 250G. He exchanges with for a farm in WV for $250. What was hos realized gaine upon the exchange?
How much must he recognize?

Answer 16

250-150=150,000

doesn’t need to recognize anything!

Question 17

What is the gains rule for involuntary conversion?

Answer 17

No gain is recognized if the property was involuntarily converted due to theft, fire, seizure, requisition or condemnation is converted into property that is “similar or related in service or use”

Question 18

Is there a time frame for getting insurance money for involuntary conversion?

Answer 18

If the property lost or damaged is converted to money, gain or loss is not recognized if the taxpayer purchases replacement property that is “similar or related in service or use” within two years from the date of involuntary conversion. Gain or loss will be recognized, however, to the extent that the money received exceeds the cost of the replacement property.

Question 19

Gates has a property worth $250,000. It burns down and has a $250,000 insurance on it, and uses it to buy the farm. Tax benefit?

Answer 19

No

Question 20

What is the rule for sale of a principle residence?

Answer 20

Up to 250,000 (or $500,000 for joint returns) of gain from the sale of a principal residence can be EXCLUDED if the property has been used and owned as the taxpayer(s) principle residence for periods aggregating two years during the five-year period ending on the date of the sale.

Question 21

Justin Beiber got a home in year 1 for 6 million. He used it for two year, except for a summer he spent in Tokyo on tour. In year 3, he sells his home for 10million. What is his realized gain?

Answer 21

10-6-250,000=3,750,000.

Question 22

Is there an alternative you might suggest Bieber that would be more beneficial?

Answer 22

Yes, leave the property alone, leave it to your heirs, then they get the 10million basis, never realized.

Question 23

What is the top marginal tax rate on most long term capital?

Answer 23

20% on assets held for longer than 12 months.

Question 24

What is the top marginal tax rate on most ordinary income?

Answer 24

39.6% for income greater than 400,000

Question 25

What are capital assets?

Answer 25

Generally investment assets. They DO NOT include inventory, property held primarily for sale to customers, depreciable property, copyrights.

Question 26

Are dividends to shareholders taxable?

Answer 26

Yea, generally for SH of domestic corporations, under capital gains.

Question 27

What are some examples or ordinary income?

Answer 27

Salary, rents, interests, royalties.