Property Taxation

Question 1

What is the definition of a qualifying small taxpayer?

Answer 1

A qualifying small taxpayer is one whose average annual gross receipts during the preceding three years are less than $10 million.
NOTE: A building is a qualifying building if its unadjusted basis is $1 million or less.

Question 2

How is cost basis determined for property acquired as a gift?

Answer 2

In general, property acquired as a gift retains the cost basis it had in the hands of the donor. However, if the fair market value of the property at the time of the gift is lower than the cost basis in the hands of the donor (as in this case), the basis to the donee depends on the donee’s future selling price of the property, as follows:

• If the future selling price is HIGHER than the donor’s cost basis, the donee’s basis is the donor’s cost basis.
• If the future selling price is LOWER than the fair market value of the property at the time of the gift, the donee’s basis is the FMV of the property at the time of the gift.
• If the future selling price is LOWER than the donor’s cost basis but HIGHER than the FMV of the property at the time of gift, neither gain nor loss is recognized by the donee on the sale of the property.

Question 3

What is the basis of inherited property to the beneficiary?

Answer 3

The basis of inherited property to the beneficiary is the FMV of the property at the date of the decedent’s death (or the alternate valuation date, if the alternate valuation date is used for determining the value of the estate for estate tax purposes) or FMV on date distributed if before six months.

Question 4

Do gift taxes paid or estate taxes paid affect the basis of inherited property?

Answer 4

Gift taxes paid on a gift may affect the basis of gifted property to the donee. Estate taxes paid on inherited property never affect the basis of inherited property to the beneficiary.

Question 5

How are stock dividends treated? (stock splits)

Answer 5

The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original share over both the original shares and the new shares received resulting in the same total basis, but a lower basis per share to stock held.

Question 6

Under the de minimus rule, how much can a Company deduct for tax purposes?

Answer 6

If the Company has a written policy to expense certain property as of the beginning of the year and an applicable financial statement, then the de minimus rule allows the Company to expense items costing up to $5,000 each.
The maximum deduction is $2,500 per asset if a company does not have an applicable financial statement.
NOTE: If the items cost an amount in excess of $2,500 or $5,000, then those items cannot be expensed under the de minimis rule.

Question 7

What is the rule for repairs and maintenance to be deducted under the safe harbor rules?

Answer 7

1) Company must be a qualifying small taxpayer
2) The building must be a qualifying building of an unadjusted basis of $1 million or less.
3) Improvements must not exceed the lesser of
- $10,000 or,
- 2% of the unadjusted basis of the building

Question 8

What are the like-kind exchange requirements for nonrecognition of gain or loss.

Answer 8

The property exchanged must be real property but cannot be in different countries.

Question 9

Is a deduction allowed for the loss on a nonbusiness disposal or loss?

Answer 9

No

Question 10

How is gain recognized on an exchange of like-kind property?

Answer 10

Gain is only recognized on an exchange of “like-kind” property for the lesser of the amount of “gain realized” or the amount of “boot” received in the exchange. Cash and Cancellation of debt is classified as “boot”

Question 11

How does the homeowner’s exclusion work?

Answer 11

The sale of the taxpayer’s personal (primary or principal) residence is subject to an exclusion from gross income for gain of $500,000 married filing joint or $250,000 single. To qualify, the taxpayer must have owned and used the property as a principal residence for two years or more during the five year period ending on the date of the sale or exchange.

Question 12

How is the basis of new property calculated for Non-Like-Kind Property when Gain is recognized and Boot is received?

Answer 12

New basis = Adjusted basis of property given up + Gain recognized - Boot received

Question 13

Can a taxpayer deduct a gain or loss on a personal-use asset?

Answer 13

A personal-use asset is a capital asset. A gain on the sale of a persona-use asset is a taxable capital gain. A loss on the sale of a personal-use asset is a nondeductible personal loss.

Question 14

Depreciable personal property used in a trade or business (including fixtures used in a retail store) is not a capital asset. What type of property it is?

Answer 14

Section 1231 or Section 1245

Question 15

Real property used in a trade or business (including real property used to store business assets) is not a capital asset. What type of property is it?

Answer 15

Section 1231 or Section 1250 property

Question 16

What are 1231 assets?

Answer 16

1231 assets are all depreciable assets and all real property used in a trade or business and held over 12 months. Net 1231 losses (Sec. 1231 losses less Sec. 1231 gains) are treated as ordinary losses. Trade or business property and capital assets (held over twelve months) that have been involuntarily converted are also included. If it is personal property then the recapture rules of Section 1245 will apply to any gains. Gain is recaptured as ordinary gain to the extent of accumulated depreciation.

Question 17

What is section 1250 property?

Answer 17

Depreciable real property used in a trade or business for more than one year is Section 1250 property. A gain on the sale of a Section 1250 asset is unrecaptured Section 1250 gain to the extent of straight-line accumulated depreciation (A/D) on the asset. Any gain in excess of the unrecaptured Section 1250 gain is Section 1231 gain.

Question 18

For income to be taxable on a tax return it must be

Answer 18

For income to be taxable on a tax return, it must be both realized (i.e., it must involve an accrual or receipt of cash, property, or services, or a change in the form of an investment, such as a sale or an exchange) and recognized (i.e., the tax law requires that the income be reported as taxable in the tax return).