Lesson 6 (Ch. 10 & 11)

Question 1

For inherited property that passes through an estate, the basis is equal to…

Answer 1

The fair market value at the date of death, or the alternative valuation date (if elected). This is often referred to as “stepped-up” basis.

Question 2

What is the holding period for inherited property?

Answer 2

The holding period for all inherited property is considered to be long-term regardless of how long the decedent actually held the property before passing.

Question 3

What is the formula for calculating “carryover basis” for gifted property?

Answer 3

Appreciation in Property / FMV of Property x Gift Tax Paid = Increase in Basis

Question 4

Dual Basis Rule for determining cost basis of gifts

Answer 4

Basis Used
Determining Gain: Adjusted Basis of Donor
Determining Loss: FMV of Property on Date of Gift

Question 5

What is the holding period for gifted property?

Answer 5

The general rule when it comes to holding period is that the holding period in the hands of the donee includes the holding period in the hands of the donor (carryover holding period). The one exception to this is if a dual-basis asset is sold for a loss, then the holding period for donee starts on date of the gift.

Question 6

Cost basis rules for related party transactions

Answer 6

Related Party Sales
Gain = Normal Rules
Loss = Dual Basis Rules

Related Party Gifts
Gain Property = Carryover Basis
Loss Property = Dual Basis Rules

Question 7

MACRS Depreciation

Answer 7

Straight line or Accelerated. (Land cannot be depreciated).

Question 8

IRC Section 179

Answer 8

This provision in the tax code permits business owners to skip depreciating certain assets over their useful lives, as was previously covered, and immediately expense these capital acquisitions.

Asset must be used primarily for business purposes (greater than 50% business use).

The deduction is limited to $1,040,000 (indexed for inflation) for 2020 and cannot be used to generate a loss. Excess can be carried forward.

Question 9

What are the three types of assets in the Income Tax System?

Answer 9

Capital Assets (Includes everything except what’s below)

Ordinary Income Assets (Accounts receivable, Creative works in the hands of the author, Inventory)

Section 1231 Assets (Depreciable Real or Personal Property held for use in a trade or business or for the production of income)

Question 10

Maximum annual deduction for capital losses?

Answer 10

$3000 (unused net losses can be carried forward indefinitely).

Question 11

Cost basis includes….

Answer 11

Cash
Cost of property given in exchange
Recourse debt used for financing
Nonrecourse debt
Costs necessary to acquire the asset and/or get it in operation (sales tax, freight, installation) - Test question on this one.

Question 12

General rule for basis of gifted property

Answer 12

Carryover basis for a gain (basis of the donor is carried over to the donee). For a loss, holding period begins on the date of the gift.

Question 13

Straight line Real Estate depreciation

Answer 13

Residential - 27.5 years
Commercial - 39 years
Land - Not depreciable

Question 14

Depreciating conventions

Answer 14

Personalty

• Half-year convention
• If more than 40% placed in service in 4th quarter, mid-quarter convention applies

Real Estate
- Mid-month convention

Intangible Property

• Straight-line
• 15 year
• Referred to as “amoritization”

Question 15

Netting capital gains and losses

Answer 15

Net short term capital gains and losses together = A

Net long term capital gains and losses together = B

Net out A and B to find C (if a gain it retains it’s holding status)

Question 16

Wash Sales

Answer 16

When a taxpayer sells stock and purchases substantially identical stock within 30 days (before or after).

Unrecognized loss added to basis of replacement security