Property Taxation

Question 1

what are the 3 types of property?

Answer 1

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

Question 2

what is a capital asset?

Answer 2

most personal use assets and most investment assets

Question 3

what are some examples of what is NOT a capital asset?

Answer 3

• inventory
• depreciable property used in a trade or business
• copyrights and creative works held by the creator
• accounts receivable and notes receivable

Question 4

what is an ordinary asset?

Answer 4

those assets that, when sold, result in ordinary income to the owner of the asset

Question 5

what is a Section 1231 asset?

Answer 5

assets used in a trade or business

either (1) depreciable property or (2) real property

Question 6

what are some examples of what is included as 1231 assets?

Answer 6

• timber
• coal
• iron ore
• certain livestock
• unharvested crops

Question 7

what is the purpose of basis?

Answer 7

to allow taxpayers to recover the value of the assets (cash) used to purchase or acquire property

Question 8

what is basis necessary for?

Answer 8

• to determine the amount of gain or loss on a sale or other disposition of property
• to determine the amount that may be recovered tax free through depreciation deductions
• to determine the deduction for obsolescence and sometimes for depletion

Question 9

what is cost basis?

Answer 9

the amount paid in cash, debt obligations, other property, or services

also includes amounts paid for: sales tax, freight, installation and testing, excise taxes, legal and accounting fees, revenue stamps, recording fees, and real estate taxes

Question 10

what are some examples of what will increase basis?

Answer 10

• capital improvements
• assessments for local improvements
• the cost of restoring damaged property after a casualty loss
• legal fees
• zoning costs

Question 11

what are some examples of what will decrease basis?

Answer 11

• exclusion from income of subsidies for energy conservation measures
• casualty or theft loss deductions and insurance reimbursements
• deduction for clean-fuel vehicles and refueling property
• section 179 deduction
• depreciation
• credit for qualified electric vehicles
• nontaxable corporate distributions

Question 12

what is the general rule for basis of a gifted property?

Answer 12

the general rule is that the donee’s basis in the gifted property is the same as the donor’s basis in the gifted property

Question 13

what are the rules related to the basis of gifted property?

Answer 13

1. general rule
2. exception
3. exception

Question 14

what is the first exception to the general rule for basis of gifted property (double basis rule)?

Answer 14

• for gains only, the basis of the donor is also the adjusted basis of the donee
• for losses only, the basis to the donee is the FMV of the property on the date of the gift
• if the asset is sold and the amount realized is between the FMV and the adjusted basis of the donor, no gain or loss is recognized

Question 15

what is the second exception to the general rule for basis of gifted property?

Answer 15

in the event that gift tax has been paid and the asset had appreciated in the hands of the donor, then the portion of the tax which is associated with the appreciation is added to the donor’s basis to determine the donee’s basis

Question 16

if you sell gifted property at a loss, then the basis of the property in the hands of the donee is … ?

Answer 16

the lower of the donor’s basis or the FMV of the property at the time of the gift

Question 17

what is the general rule for the holding period for gifted property?

Answer 17

the holding period in the hands of the donee includes the holding period of the donor

Question 18

what is the rule for the holding period for gifted property if the double basis rule applies?

Answer 18

if the double basis asset is sold for a loss, then the holding period for the donee starts on the date of the gift