M3: Gains and Losses

Question 1

Capital Assets

Answer 1

Property (real & personal) held by the taxpayer:

• personal automobile
• fixture & furniture held by taxpayer
• stocks and securities; (except those held by dealers)
• personal property held by taxpayer NOT used in trade or business
• real property NOT used in trade or business
• interest in partnership
• Goodwill of corporation
• copyrights, literary, musical, or artistic compositions that have been purchased
• other assets held for investment

Question 2

Non capital Assets

Answer 2

• Property normally included in INventory or held for sale to customers in the ordinary course of business
• Depreciable personal property (business used PPE) used in trade or business (Section 1231)
• AR and notes receivable arising from sales or services in the taxpaers business
• copyrights, literary, musical, or artistic compositions held by the original artists
• Treasury stock

Question 3

Installment method

Answer 3

Under the installment method, revenue is reported over the period in which the cash payments are received. the amount of cash received is multiplied by the gross profit percentage on the sale to determine the revenue .

Installment sale treatment of gains is allowed between related properties. Deprecialbe property is generally disallowed between related properties. Land is not depreciable.

Question 4

Capital loss

Answer 4

capital loss can offset capital gains and then a maximum of $3,000 from other income sources can be offset with capital losses (AGI). remaining losses are carried forward indefinitely

Question 5

Section 1245 (Machinery & Equipment)

Answer 5

1245 assets are all personal property used in trade & business. Recapture ALL accumulated depreciation as ordinary income (lesser of gain recognized or accumulated deprecation is reorganized as ordinary income under Section 1245. Remaining is 1231 (long term capital)gain.

Pass Key:
loss is treated as ordinary loss
ordinary income = gain to extent of accumulated depreciation
Section 1231: gain for sale in excess of original cost

Question 6

Section 1250 (Real Property):

Answer 6

For CORPORATIONS is equal to 20% of the lesser of the recognized gain or the accumulated straight-line depreciation. For corporations only benefit of capital gain is to offset capital losses.

For individuals: lesser of the recognized gain on the sale of the Section 1250 OR the straight line accumulated depreciation on the Section 1250 asset is taxed at a maximum rate of 25 percent.

Question 7

Section 1231

Answer 7

section 1231 are composed of principally depreciate personal and real property used in tax payers trade or business and held over 12 months. Fully deductible against ordinary income. Also must be a tangible asset (deprecialbe)

Question 8

Section 1244 loss

Answer 8

is a ordinary and not a capital loss