Other tax items

Question 1

Sale of PRIMARY RESIDENCE rules

Answer 1

• First $500,000 (joint return) or $250,000 of GAIN is NON-taxable
• Had to be primary residence for at least 2 of the last 5 years
• Can only claim tax-free amount every 2 years

Question 2

Do you need to buy another house in order to claim $250K/$500K gain exemption?

Answer 2

No, irrelevant information.

Question 3

What happens to home improvements made in regards to gain on sale of primary residence?

Answer 3

The cost of home improvements are added to the basis of the home for purposes of calculating gain.

Question 4

What happens if you sell a home with a “home office” that was depreciated over the years?

Answer 4

All depreciation must be recaptured for purposes of computing basis.

Regardless of exemption, accumulated depreciation becomes taxable upon sale.

Maximum 25% rate

Question 5

What if a person lives in the house for 2 years, moves out, then rents it out. Do they still qualify for exemption?

Answer 5

YES, because initially the house was intended to be a primary residence.

They must live there first. If they don’t live in it right after they buy it, IRS says it was never intended to be a primary residence.

Question 6

Involuntary Conversion rule: how much gain to be realized?

Answer 6

Taxable gain is the lower of the realized gain VS.

Money leftover from insurance (if new property purchased is MORE than insurance proceeds, NO GAIN)

Question 7

Involuntary Conversion: what is the basis in the new asset?

Answer 7

Basis of the old asset +

Any out-of-pocket money spent

Question 8

How long do you have to replace BUSINESS PROPERTY after the receipt of insurance proceeds?

Answer 8

3 years from receipt

Question 9

How long do you have to replace PERSONAL PROPERTY after the receipt of insurance proceeds?

Answer 9

2 years after the receipt of business proceeds

Question 10

Note on insurance proceeds:

If the REALIZED GAIN exceeds $_______, property acquired from related parties do not qualify as replacement property.

Answer 10

$100,000

Question 11

Exam tip regarding INSURANCE PROCEEDS, the correct date is always!

Answer 11

December 31st

Either 2 years of 3 years from the date the proceeds were received

2 years (personal property)
3 years (building)

Question 12

What is considered a Related Party for an individual? (2)

Answer 12

(a) A member of the family (spouse, brother, sister, ancestor, descendant)
(b) Businesses where the taxpayer holds more than 50% of ownership

Question 13

How are Related Party transactions taxed?

Answer 13

Gains are still taxable

Losses are disallowed until the related party sells the item to an unrelated party.

Question 14

Common disallowed losses on Exam

Answer 14

Father sells to daughter

Brother sells to sister

Grandfather sells to grandson

LOSSES DISALLOWED!

Question 15

Is there carryover in holding periods for related parties?

Answer 15

NO, holding period begins when transferred.

Question 16

Wash sale - what happens to the loss?

Answer 16

Gets added to the basis in that stock.

Question 17

How do you calculate the holding period of a wash sale?

Answer 17

Begins with the date of acquisition of the original stock that created the deferred loss.

Question 18

What does “substantially similar” mean in terms of a wash sale?

Answer 18

Bonds/preferred stock of same company if both convertible = wash sale

Sell stock in brokerage account, buy in IRA = wash sale

Single company, then buy ETF with same company in fund, NOT wash sale.

Question 19

Long-term capital gains rates

Answer 19

MFJ:
$0-77,200 - 0%
$77,200 - 479,000 - 15%
$479,000+ - 20%

Single needs over $425,000 to be taxed at 20%

Question 20

What are defined as collectibles? What is the tax rate for collectibles?

Answer 20

Stamps, coins, antiques, artwork, gold & silver.

Ordinary income rate is used, subject to a maximum of 28%

Question 21

Sale of Rental Property - what is the capital gain rate for recapture of straight-line depreciation?

Answer 21

Lower of tax bracket OR 25% maximum net capital gain rate for straight-line depreciation

“Unrecaptured Section 1250 Gain”

Section 1250 deals with depreciation recapture on real estate

Question 22

Max rate for Gain on Sale of Rental Property (Section 1250)

Answer 22

25%

Question 23

Additional 3.8% Tax on Net Investment Income

Who does that apply to?

What is to help pay for?

Answer 23

3.8% surtax is to help pay for Obamacare.

If modified AGI exceeds $250,000 MFJ / $200,000 single

(lesser of net investment income OR excess of AGI over AGI threshholds)

Question 24

What is considered “Net Investment Income”?

Answer 24

Net Investment Income includes income from interest and dividends and capital gains

Question 25

Section 1244 Small Business Stock loss rules

• Corporation must have total capitalization of ________ or less
• Rule only applies to the ____________
• Maximum of $_____ per year / $_____ MFJ
• Any excess is considered a ______ ________ and is limited to $_____per year

Answer 25

• Corporation must have total capitalization of $1,000,000 or less
• Rule only applies to the original stockholder
• Maximum of $50,000 per year / $100,000 MFJ
• Any excess is considered a capital loss and is limited to $3,000 per year

Question 26

Is Section 1244 worthless stock loss per year or per security?

Answer 26

Per year

Question 27

Where do Section 1244 gains and losses get reported?

Answer 27

First on Schedule 4797,

Then excess capital loss goes to Schedule D.

Question 28

How are gains on Qualified Small Business Stock handled?

Answer 28

An individual who holds qualified small business stock for more than 5 years may generally exclude 100% of the gain on the sale.

• Exclusion is limited to 10x basis.
• C-corp only
• Less than $50M market cap
• If excess, taxed at ordinary rates, not capital