Part 3: Property Transactions - Federal Taxation Flashcards
IRC Section 1231 Assets
Depreciable assets and real estate used in a trade or business AND held for more than one year
Includes: timber, coal, domestic iron ore, livestock (held for draft, breeding, dairy, or sporting purposes), and unharvested crops
Does NOT include inventory
Installment Method
Enables taxpayers to spread the recognition of gain on sale of property over the payment period. Seller will compute gross profit percentage from the sale and apply it to each payment received to arrive at the gain to be recognized.
Total Payments Received \+ Mortgage Assumed by buyer - Taxpayers basis \+ Selling expenses = Gross Profit
Gross Profit % = Gain/Sales Price
Realized Gain or Loss - Formula
Cash received \+ FMV of property received \+ Liabilities assumed by the buyer - Selling expenses = Amount realized - Adjusted basis = Realized gain or loss
Individuals - Net long-term capital gains are taxed at
Capital gains tax rate
Individuals - Net short-term capital gains are taxed at
Taxpayer’s marginal tax rate
Individuals - Net capital losses are
Deductible for AGI up to $3,000; any excess loss is carried forward indefinitely as STCG
Related Party Transactions - Gain/Loss treatment
Loss: Generally, no loss is recognized. The disallowed loss, however, is suspended until the related party disposes of the property. If the property is later sold for a gain, the disallowed loss may be used to offset the gain. If it is later sold for a loss, the disallowed loss is never recognized.
Gain: Ordinary income even if the property is a capital asset
For property transactions, related parties include
Members of family, including grandparents, parents, children, grandchildren, brothers, sisters, aunts, uncles, nieces, and nephews
Any individual, corporation, or partnership that is more than 50% owned directly or indirectly
Wash Sale of Stock Tax Treatment
If a taxpayer sells and repurchases substantially identical stock within 30 days or the sale, any loss on the transaction is disallowed
Tax treatment - Section 1244 Stock
- Deducted as an ordinary loss limited to $50,000 single/$100,000 joint
- Any losses beyond that amount are treated as capital losses
- Gain = Capital Gain
Section 1244 Stock
- Corporation’s aggregate capital doesn’t exceed $1,000,000 when the stock was issued
- Corporation must not derive more than 50% of its income from passive investments
Basis of property received as a gift
Lower of:
- Donor’s Basis + Gift tax paid
- FMV on date of gift
* No gain/loss computed if selling price is less than basis for gain and more than basis for loss
Basis of property in a Like-Kind Exchange
IRC 1031 - no gain is recognized on business or investment asset like-kind exchanges unless boot (cash) is received
Basis of old property \+ Boot paid - Boot received \+ Gain recognized = Basis of new property
Sale of principal residence
Gain is excluded from income up to $250,000 singe/$500,000 joint
- Principal residence for at least 2/5 last years before the sale
Code Section 1231
Recharacterizes the gain from the sale of the depreciable property as capital even though it has been exempt from the capital asset classification i.e. long-term capital gain treatment for certain transactions involving non-capital assets (generally land, buildings, and equipment used in a trade or business) *
*Gain > Loss - net gain is treated as ordinary income to the extent of net 1231 loss claimed by the taxpayer in the previous 5 years; excess is long-term capital gain
If the property is sold at a loss, the loss is ordinary, not capital, and fully deductible
