Gains or Losses from the Sale or Disposition of Property

Question 1

Amount Realized

Answer 1

Definition:

• The amount of money and FMV of any property received in return for the property disposed of

Question 2

Mortgages, liabilities, or encumbrances

Answer 2

• Where a taxpayer disposes of property encumbered by a mortgage, the amount realized includes
• Cash received and amount of the mortgage if the buyer assumes it

Question 3

Adjusted Basis

Answer 3

Definition

• The original cost of the property adjusted upwards for items like improvements, and adjusted downwards for items like depreciation

Question 4

Inherited Property

Answer 4

Rule:

• Basis of inherited property is FMV at the date of decedent’s death

Question 5

Gifted Property

Answer 5

RULE

• Donee’s basis in property acquired by gift is generally the same as donor’s basis

Question 6

Formula for determining gain

Answer 6

Amount realized

–

adjusted basis

=

gain

Question 7

Personal losses

Answer 7

Not deductible

Question 8

Sale to Relatives

Answer 8

If you sell to a relative brothers, sisters, spouse, ancestors, or direct descendants, or to any closely related trust or corporation, then the loss will not be recognized

Question 9

What is capital asset?

Answer 9

Defintion:

• Property,
• except for stock and trade, inventory, or property primarily held for sale to customers in the ordinary sale of business

Special rule for Copyrights; literary, musical, or artistic compositions:

• In the hands of the person who created them, they are not capital assets, and if they’re giving away (and have the same basis as the donor) they are not capital assets

Patents (unlikely to see on exam)

• get capital gain treatment under the Code

Question 10

How to Answer a Tax Question Involving Sale, Exchange, or Other Disposition of Assets

Answer 10

1. Determine if a sale, exchange, or other disposition has occured (look for a transfer of property)
2. Determine amount realized (what did the person who transfered the property get for it)
3. Determine taxpayers basis in the assets disposed of
4. Compute the amount of gain or loss; and
   
   • Gain = amount realized – basis
   • Loss = basis – amount realized
5. Check to see whether any of the nonrecognition sections apply