Part VII: Property Taxation Issues

Question 1

For tax purposes, business assets can be divided into 3 categories:

Answer 1

1. ordinary assets
2. Section 1231 assets
3. capital assets

Question 2

ordinary assets

Answer 2

inv., A/R, N/R

Question 3

Section 1231 assets

Answer 3

depreciable property used in a trade or business that have been owned for more than a year.

Question 4

capital assets

Answer 4

1. assets other than what is listed as ordinary assets or 1231 assets.
2. also includes property held for inv. use or personal use.
3. keyword: “investment.”

Question 5

Realized gains must be computed when…

Answer 5

property is sold or disposed of.

Question 6

realized gain formula

Answer 6

amount realized
- adjusted basis
= realized G/L

Question 7

amount realized

Answer 7

cash received 
\+ FV of property/services received 
\+ liabilities assumed by the buyer
- selling expenses
= amount realized

Question 8

adjusted basis

Answer 8

cost of property, which includes any capital improvements

Question 9

gifts

Answer 9

1. When property is received as a gift, there is a gain basis, and a loss basis.
2. This is to make the taxable gain as big as possible, and any loss to be as small of a tax benefit as possible, since it was a gift.

Question 10

gain basis of a gift

Answer 10

adjusted basis the donor had in the property

1. Also the depr. basis.

Question 11

holding period (gain basis)

Answer 11

includes the donor’s holding period if the gain basis will be used to compute a gain

Question 12

loss basis of a gift

Answer 12

lower of the FMV at the date of gift, or the adjusted basis of the donor

Question 13

holding period (loss basis)

Answer 13

begins on the date of the gift if the loss basis is used to compute a loss

Question 14

When is a gain recognized on a gift of property?

Answer 14

If the property is later sold for more than the gain basis.

Question 15

When is a loss recognized on a gift of property?

Answer 15

If the property is later sold for less than the loss basis.

Question 16

If the property is sold for an amount btwn. the gain and loss basis…

Answer 16

there is no G/L recognized.

Question 17

basis in property received from an inheritance

Answer 17

1. FMV at date of death

2. If alternate valuation date is used, FMV at 6 mos. after date of death.

Question 18

LTCG/LTCL

Answer 18

1. for assets held 1+ yrs.

2. All LTCGs and LTCLs are netted together.

Question 19

STCG/STCL

Answer 19

1. for assets held 1 yr or less.

2. All STCGs and STCLs are netted together.

Question 20

If the net STCG/L and net LTCG/L are negative…

Answer 20

the resulting net cap. loss can be deducted from ordinary income up to $3,000.

Question 21

If the net STCG/L and net LTCG/L are positive…

Answer 21

it is taxed as ordinary income.

Question 22

net capital loss carryback/carryforward

Answer 22

1. Losses carried back 3 yrs. and carried forward 5 yrs.

2. Cany only be used to offset cap. gain NI but cannot create a NOL.

Question 23

recapture rule for 1231 assets

Answer 23

When 1231 assets are sold, depr. on asset is recaptured and recognized as ordinary income.

Question 24

2 types of 1231 recapture

Answer 24

1. Section 1245.

2. Section 1250.

Question 25

Section 1245

Answer 25

takes on gains up to the amount of acc. depr.
1. If you sell an asset for 200 that you bought for 150, and there is 50 A/D, so the basis is 100, then the 50 A/D becomes ordinary income. The remaining 50 A/D is a 1231.

Question 26

Section 1250

Answer 26

recapture of acc. accelerated depr. on building in excess of straight-line depr. as ordinary income.

Question 27

netting 1231 G/L

Answer 27

1. To the extent 1231 G > 1231 L, net gain is a LTCG.

2. If 1231 G

Question 28

lookback provision

Answer 28

1. 1231 G must be offset by net 1231 L going back 5 yrs. that have not been previously recaptured.
2. Any G that can be absorbed by previous 1231 L are treated as ordinary income.

Question 29

Depreciation acts as…

Answer 29

cost recovery.

As such, there are rules as to what can be depreciated.

Question 30

What kind of property can be depreciated?

Answer 30

1. Business property.

2. Income-producing property.

Question 31

personalty

Answer 31

personal, movable property

Question 32

realty

Answer 32

real, fixed property

Question 33

Under MACRS, how is personalty depreciated?

Answer 33

200% or 150% declining balance

Question 34

Under MACRS, how is realty depreciated?

Answer 34

straight-line

Question 35

business use test

Answer 35

1. Property is used for business 50+% of the time.

2. Must be passed to use regular MACRS.

Question 36

Section 179 election

Answer 36

1. allows a taxpayer to expense a certain amount of bus. property
2. Amount expensed cannot exceed bus. income.

Question 37

like kind exchange rule

Answer 37

1. When like kind property is exchanged, not G/L unless boot is received.
2. All realty is considered like kind for the purpose of this rule.

Question 38

boot

Answer 38

1. Cash or other nonqualifying property added to an exchange or other transaction in order to make the value of the traded goods equal.
2. Debt relief is also boot.
3. When boot is received in an exchange, the recognized gain is the amount of boot received.

Question 39

A taxpayer an exclude up to ________ when s/he sells his/her principal residence.

Answer 39

$250,000 ($500,000 MFJ)

Question 40

To use the exclusion on sale of principal residence, the taxpayer must…

Answer 40

1. Own and live in the residence for 2 of the 5 yrs. before sale occurs.
2. Once exclusion is claimed, it cannot be used for at least 2 yrs.