Ind. Inc. Tax: Exchanges

Question 1

2 categories of capital assets for ind. taxpayers:

Answer 1

personal and investment property

Question 2

Are G/L on investment property reported?

Answer 2

Yes.

Question 3

Are G/L on personal property reported?

Answer 3

Only gains are reported.

Question 4

wash sale

Answer 4

occurs when substantially identical securities are bought within 30 days either before or after the date of the sale or disposal. Here, the taxpayer bought the same shares within 30 days of the sale.

Question 5

Are losses on a wash sale deductible?

Answer 5

No.

Question 6

Are gains on a wash sale taxed at the capital gains rate or as ordinary income?

Answer 6

Fully taxable as ordinary income.

Question 7

deductibility of net capital losses

Answer 7

1. Of the net loss of the STCL - LTCG or LTCL - STCG, $3,000 is deductible against ordinary income.
2. The remainder of the loss is carried forward indefinitely to impact future capital gain and loss computations.

Question 8

How are related party transactions (RPTs) handled for tax purposes?

Answer 8

Gains from RPTs are taxed, but losses are not deductible.

Question 9

For what filing status is only 1/2 the ordinary deductible amount for netcapital losses, or $1,500 allowed as a deduction against ordinary income?

Answer 9

MFS. For all others, it is $3,000.

Question 10

How are non-business bad debts deemed worthless handled for tax purposes?

Answer 10

They are written-off in the year the loan is determined worthless and are categorized as a
STCL, meaning that no lost interest income can be written off, only the loan principal.

Question 11

1. On what tax form and 2. when is the write-off of non-business bad debts recorded?

Answer 11

1. Schedule D of Form 1040.

2. In the year determined worthless.

Question 12

What is the basis of a gift received?

Answer 12

The basis in the hands of the previous owner.

Question 13

When a gift received is sold for less than the basis in the hands of the previous owner, what is the seller’s basis?

Answer 13

The seller will then use the lower of the previous owner’s basis or the FV at the date of the gift as the basis.

Question 14

When a gift received is sold for more than the FV at the date of the gift, but less than the original owner’s basis…

Answer 14

no G/L is reported.

Question 15

How is the value of assets received through inheritance reported for tax purposes?

Answer 15

They are not reported as income.

Question 16

What is the tax basis of property received through inheritance?

Answer 16

The property will have a tax basis either:

1. Equal to the FV of the assets on the date of death.
2. OR, 6 mos. from the date of death unless the conveyance date occurs w/in first 6 mos. (alternate valuation date).

Question 17

At what rate are net STCGs taxed?

Answer 17

Ordinary income rates.

Question 18

At what rate are net LTCGs taxed?

Answer 18

Capital gains rates.

Question 19

Why are LTCGs given a tax advantage or STCGs?

Answer 19

To encourage investors to buy capital assets and hold them for longer than one year.

Question 20

qualified dividends

Answer 20

Dividends collected from a U.S. domestic corporation or a qualified foreign corporation.

Question 21

How are qualified dividends taxed?

Answer 21

To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to LTCGs.

Question 22

How are G/Ls on like-kind exchanges reported if boot is received? If boot is given?

Answer 22

1. If no boot is received, no G/L.
2. If boot is given, the tax basis in the property = tax-basis in asset given up + boot. Gain = boot.
3. If boot is received, the tax basis in the property = tax-basis in asset given up - boot. Loss = boot.

Question 23

How are G/Ls on non-like kind property handled?

Answer 23

1. The basis of the property given up (tax-basis in asset given up + boot) is removed and subtracted from FV to determine the G/L.
2. The tax basis for the new asset is the asset’s FV.

Question 24

condemned property transaction

Answer 24

An owner is paid a certain amount, usu. FV on property that the govt. is seizing through eminent domain.

Question 25

G/L on condemned property

Answer 25

Gain is the lower:

2a. amount received - tax basis
2b. OR, proceeds left over after similar replacement property is acquired.

Question 26

gain on personal residence

Answer 26

1. MFJ couple can exclude up to $500,000 of the gain on their personal residence.
2. A single taxpayer can exclude $250,000.

Question 27

rules for gain on personal residence exclusions

Answer 27

1. The structure had to be their principal residence for at least two of the most recent five years.
2. This exclusion cannot be taken in two consecutive years.

Question 28

gain on sale of property received as a gift

Answer 28

selling price - previous owners’ tax basis

Question 29

loss on sale of property received as a gift

Answer 29

1. (lower of selling price and FV at time of conveyance) - previous owners’ tax basis.
2. No gain reported upon initial receipt of gift, just the loss when incurred.

Question 30

G/L on sale of property received as a gift when selling price is above FV at time of conveyance but lower than previous owner’s basis

Answer 30

No G/L recognized.

Question 31

G/L on sale on property when stolen and not recovered, but insurance settles claim and payment used to buy replacement

Answer 31

1. If insurance payment > tax basis, no gain reported b/c involuntary conversion.
   1a. A gain is recognized is replacement asset is sold = selling price - (basis of first asset + additional funds paid for new asset).
2. If insurance payment

Question 32

When stock is exchanged for services, what is recorded as ordinary income? The stock FV or the value of the services?

Answer 32

1. The stock FV at the time received.

2. Any excess in stock value above BV is a STCG.

Question 33

gain on like-kind exchange

Answer 33

lower of the gain on the trade or the cash (boot) received.

Question 34

loss on like-kind exchange

Answer 34

tax basis given up - FV received.

Question 35

capital loss deduction for MFJ

Answer 35

1. $3,000 in capital losses can be deducted each year.
2. STCLs deducted before LTCLs.
3. Remaining amounts can be carried over indefinitely.

Question 36

In a like-kind exchange, basis of new asset =

Answer 36

total tax basis surrendered = remaining tax basis of old asset + cash paid for new asset (or new asset list price - trade-in allowance).