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CFP Exam Prep > Property Taxation > Flashcards

Property Taxation Flashcards

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1
Q

What is and is not a Capital Asset?

A

Most personal use assets and most investment assets are capital assets.

Assets that ARE NOT capital assets or Section 1231 assets are ORDINARY INCOME assets.

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2
Q

Section 1221(a) of the IRC defines what is not a capital asset including what assets?

A

Remember ACID (all are ORDINARY INCOME):

Accounts and notes receivable

Copyrights and creative works (if held by the creator of such works)

Inventory

Depreciable property used in a trade or business

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3
Q

What are Section 1231 Assets?

A

Used in a trade or business

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

Specifically includes certain property such as:
Timber
Coal
Iron Ore
Certain Livestock
Unharvested crops (under certain conditions)

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4
Q

Under what 3 circumstances is FMV the cost of property acquisition?

A

taxable exchange

subject to a mortgage

a dividend in kind or as compensation for services at the time of acquisition

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5
Q

What items are included in cost basis?

A

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

sales tax
freight
installation and testing
excise taxes
legal and accounting fees (when must be capitalized)
revenue stamps
recording fees
real estate taxes (if assumed for the seller)

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6
Q

What items increase or decrease the basis of an asset?

A
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7
Q

How do you determine the adjusted taxable basis and subsequent boot?

A

Exchange acquisitions will have carryover basis

No boot when of equal value

Exchange for more valuable asset (boot is paid), new asset = carryover basis + boot paid

Exchange for less valuable asset (boot is received), new asset = carryover basis - boot received greater than the gain

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8
Q

What is ALWAYS the holding period for capital gains of inherited property?

A

Always a long-term holding period

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9
Q

What are the basis rules for Gifted Property and the exceptions?

A

General rule and two exceptions:

GENERAL RULE: DONEE’S BASIS = DONOR’S BASIS

Exception 1 = when gifted asset FMV < donor’s basis (loss property)
- DOUBLE BASIS RULE
- Gains Only: donor basis = adjusted basis of donee
- Losses Only: donee basis = FMV on date of gift
- When donee sells asset and is between FMV at time of gift and donor adjusted basis, no gain or loss is recognized

Exception 2 = when gift tax has been paid
- donor appreciated asset, portion of tax for appreciation is added to donor’s basis

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10
Q

How do you calculate the donee’s basis when gift tax is paid on an appreciated asset?

A

Donor’s Basis + [Net Appreciation in Gift Value / Taxable Gift Value] X Gift Tax Paid

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11
Q

How do you determine the loss on the sale of Gifted Property?

A

Basis of the property for the donee is the lesser of:

  • donor’s basis, or
  • FMV at time of gift
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12
Q

What is the holding period for Gifted Property?

A

GENERAL RULE: GIFTED PROPERTY HOLDING PERIOD = DONOR’S HOLDING PERIOD

If DOUBLE BASIS ASSET (gifted asset w/ FMV < donor’s adjusted basis at time of gift) is sold for a loss, the holding period starts on the DATE OF THE GIFT

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13
Q

How do you calculate Capital Gains on Gifted Property?

A
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14
Q

How are losses treated in a Related Party Transaction?

A

Related Party Transactions Rule (Section 267 - sale to a related party)

ONLY affects transactions with a LOSS

Transferor’s loss is FOREVER LOST

TRANSFEREE GETS DOUBLE BASIS

HOLDING PERIOD IS ALWAY DATE OF SALE

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15
Q

How do you calculate the basis in Bargain Sales to Charity?

** Property sold to charity for less than FMV

A

Sale Basis = [Amount Realized / FMV] X Property Basis

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16
Q

What holding period is required to for dividends to be considered qualifying dividends for LTCG treatment?

** Use the Net Investment Income Tax Tables

A

Qualifying dividends must be held 60 days or longer

** Use the Net Investment Income Tax Tables for LTCG and qualifying dividends

** Tax imposed on the lesser of individual’s net investment income or MAGI in excess of the limits

17
Q

What are exceptions to LTCG and qualifying dividends with AGI limits?

A

Collectibles @ 28%

Unrecaptured Section 1250 gain (equal to the straight-line depreciation) @ 25%

Qualifying Small Buiness Stock (Section 1202)
- percentage of gain @ 25% if HP >= 5 years
- can exclude 100% if the QSBS acquired after 9/27/2010

18
Q

Capital assets are taxed only when these two things happen?

A
  1. Realization event = a disposition of property (sale or exchange) OR segregation of the gain
  2. Recognition event = when a realized gain is taxed

** GENERAL RULE: realized gains are recognized (taxed) unless an exception can be found in the IRC

Exception provides:
- a gain is exempt from taxation OR
- the gain is deferred to a future time

19
Q

What is the formula for Calculation of Gain or Loss?

A

Amount Realized - Adjusted Basis = Realized Gain/Loss

Adjusted Basis = Cost of Property + Capital Additions - Cost Recovery

** Ordinary or Capital
- ordinary gains are fully taxable
- ordinary losses are fully deductible
- capital gains and losses are subject to special tax treatment

20
Q

Wash sale rules in relation to index funds differ in what way?

A

Index fund for Index fund = Wash Sale Rule APPLIES

Index fund for Managed Large Cap Fund = Wash Sale Rules DO NOT APPLY

21
Q

What are the personal residence exclusion parameters?

A
  1. Property must have been owned and occupied as a principal residence for 2 out of the last 5 years.
    ** A one year nursing home stay does not count toward the 2 year requirement.
  2. Exclusion can only be used once every 2 years.

Any appreciation during non-qualified use periods are not subject to the exclusion.

Single filer = $250,000
MFJ = $500,000 (BOTH must meet the USE requirement and not have utilized the exclusion within the last 2 years but EITHER may meet the OWNERSHIP requirement)

22
Q

When is a reduced personal residence exclusion available?

A

Sale of personal residence is due to:

  • a change in employment (qualified move for you or your spouse)
  • a change of health (diagnosis, cure, mitigation, treatment for parent, grandparent, child, grandchild, sibling, in-laws, aunt, uncle, niece, nephew, or cousin)
  • Other unforeseen circumstances (broad – e.g., disaster area, involuntary conversion, death, unemployment, divorce/breakup of engaged couple, multiple births from the same pregnancy, bullying)

Amount excluded is based on the period of ownership between the last sale and the current sale (pro rata)

23
Q

When is the loss resulting from worthless securities deductible?

A

in the year the securities become completely worthless

Section 165 sets the artificial sale date for the securities as the last day of the year the securities became worthless

considered a long-term capital loss

24
Q

Summary of Treatment of Gains and Losses for Different Types of Assets

A
25
Q

How do you determine Net Capital Gains?

A

Net gains and losses by holding period (LT against LT, etc.)

If excess losses result, they are shifted to the category carrying the highest tax rate.

26
Q

What are the steps to follow to determine the net capital gain or loss?

A

Step 1 - Net LTCG and LTCL

Step 2 - Net STCG and STCL
- if both LT net gains and ST net gains, stop here. Both should be recognized.

Step 3 - If net loss in one category and net gain in other, the net LT gain/loss should be netted against the net ST gain/loss.
- if net LT gain and net ST loss, the net ST loss reduces the net LT gain
- if net LT loss and net ST gain, the net ST gain reduces the net LT loss

** Remember the gov’t does not like losses. NET ST ALWAYS REDUCES NET LT GAIN OR LOSS.

27
Q

Section 267 disallows losses from direct or indirect sales or exchanges of property between related parties. What related parties are included?

A

Siblings (include half, not step)
Lineal descendants (children & grandchildren)
Ancestors (parents & grandparents)
Spouse

** Section 267 does not apply to gains

28
Q

What is a Section 1231 gain or loss?

A

Gain or loss from a business asset disposition

29
Q

What is a Section 1231 Asset and the main benefit?

A

Depreciable or real property used in a trade or business

owner must have a LT holding period

main benefit: gains treated as capital gains and losses treated as ordinary losses for income tax purposes

** corporations have no tax benefit because same rate of tax on ordinary income & capital gains

30
Q

What is the purpose of depreciation?

A

to allow individuals and businesses who use property in productive use or in a trade or business to RECOUP THEIR CAPITAL OVER THE USEFUL LIFE OF THE ASSET AGAINST ORDINARY INCOME AS AN EXPENSE SO THAT CAPITAL CAN BE REINVESTED TO GENERATE MORE INCOME

31
Q

What is Section 1245 property and how is it treated for tax purposes?

A

property that is or has been subject to an allowance for depreciation or amortization

tangible personalty used in a trade or business and includes depreciable property (e.g., equipment), patents, copyrights, and other intangibles

**REAL PROPERTY ≠ Section 1245 property

32
Q

What are the four possible tax results when Section 1245 property is sold?

A
  1. sell price = adjusted basis
    - no gain or loss therefore no tax consequences)
  2. sell price < adjusted basis
    • ordinary loss, no depreciation recapture
  3. sell price > adjusted basis but gain < depreciation taken
    • ordinary gain to the extent of the gain, too much depreciation taken and must give it back
  4. sell price > adjusted basis and gain > depreciation taken
    • ordinary income to the extent of depreciation taken and capital gain on the remainder of the gain, asset appreciated vs. depreciated

** THE ONLY WAY TO HAVE A SECTION 1231 GAIN ON A SECTION 1245 PROPERTY IS TO SELL IT FOR MORE THAN IT WAS ORIGINALLY PURCHASED FOR.

** ANY SECTION 1245 ASSET SALE > ORIGINAL PURCHASE IS A SECTION 1231 GAIN

33
Q

What are considered to be non-taxable exchanges by Congress?

A

Nonrecognition Transactions
- “Realized” but not “Recognized” Income
- Like-Kind Exchanges (1031 real property exchanges, mandatory when available)
- Principal Residence
- Investment Real Estate
- Life Insurance Policies

Nontaxable Transactions
- Recognition postponed to a future date (via a carryover basis)
- Carryover basis
- Holding period for a new asset
- Depreciation recapture
- Tax-free transaction (nonrecognition of gain is permanent)

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