Prop Transactions - Sales & Dispositions of Assets

Question 1

Define “return on capital.”

Answer 1

The cost of goods or property sold is recovered before any gain is realized.

Question 2

Define “capital assets” and list the two most common categories of capital assets.

Answer 2

Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business or creative works (in the hands of the creator).
Two common categories are assets used in one’s personal life and investments.

Question 3

Define “Long Term Holding Period.”

Answer 3

More than 1 year.

Question 4

How does one determine the basis of inheritances?

Answer 4

Fair market value on date of death or alternate valuation date (as selected by the executor of the estate);

Question 5

Define “Section 1231 assets.”

Answer 5

Realty and depreciable property used in a trade or business owned more than one year.

Question 6

How does one determine the basis of gifts?

Answer 6

1. Gain basis = donor’s adjusted basis;
2. Loss basis is the lower of gain basis or FMV;
3. Depreciable basis = gain basis.

Question 7

The basis is increased for the portion of any gift tax paid by the donor due to appreciation in the property

Answer 7

Adjustment to basis = Unrealized appreciation /
(FMV at date of gift − annual exclusion) × Gift Tax paid