Property Taxation (Lesson 1) Flashcards
What is considered a capital asset
- most personal use assets and most investment assets are capital assets
What are not considered a capital assets
(ACID)
- Accounts and notes receivable
- Copyrights and creative works
- Inventory
- Depreciable property used in a trade or business
What are ordinary assets
- assets that when sold result in ordinary income to the owner of the asset
What are 1231 assets
- Assets used in a trade or business
- Either depreciable property or real property
Section 1231 assets do not include
- Inventory
- property held by the taxpayer primarily for sale to customers
- copyrights or creative works
Section 1231 property specifically includes certain property such as
- Timber
- Coal
- Iron ore
- certain livestock
- unharvested crops
What does the recovery of capital doctrine state
- basis is usually returned to a taxpayer tax free either as the result of a sale or as the result of depreciation deductions
What does cost basis include
- amount paid in cash, debt obligations, other property, or services
Also includes the below items
- Sales tax
- freight
- installation and testing
- excise taxes
- legal and accounting fees
- revenue stamps
- recording fees
- real estate taxes
When property is acquired in a taxable exchange the cost is the
- FMV of the property given in the exchange for what is recieved
When property is acquired subject to mortgage the basis of the property is
- FMV of the property
When property is acquired as a dividend in kind or as compensation for services the taxpayers basis in the property is
- the FMV of the property at the time of acquisition
What is the basis of property acquired by nontaxable exchange
- if exchanged for property of equal value (no boot is received) the carryover basis is used
- If higher value property is received then the boot paid is the carryover basis plus boot
- If lower value property is received then the the boot is received it is the carryover basis reduced by any boot received
What is the general rule for basis in gifted property
- same as the donors basis
(FMV of the gifted property is less than the Donors basis)
What is the basis of a gift if the Sale Price is greater than the Donors original basis
- Original basis is used
(FMV of the gifted property is less than the Donors basis)
What is the basis of a gift if the Sale Price is less than the FMV on the date of gift
- FMV on date of gift is used
(FMV of the gifted property is less than the Donors basis)
What is the gain/loss of an asset that is sold between the FMV on the date of gift and the Original basis of the donor
- No gain or loss
- Basis equals sale price
What is the formula to determine basis for a gift where gift tax has been paid
- Only used if sold for a gain
DB + {(Gain/FMV on date of gift) x gift tax paid)}
What is the holding period for gifted property
- same as donor
What is the holding period of the gifted property when the double basis rule applies and FMV on date of gift is used
- Begins on date of gift
How are transfers of property between spouses incident of divorce treated
- the same as gifts
- carryover basis applies
- No gain or loss is recognized on a transfer between spouses or between former spouses
- treated as an incident of divorce if it occurs within one year of the date on which the marriage is legally ended and is related to the cessation of the marriage
What are the related party transactions (Section 267) Rule
- only affects transactions where there is a loss
- transferors loss is forever lost, transferee takes asset with double basis rule
- Holding period always begins at the date of the sale
What happens if a taxpayer sells property to a charity for less than its FMV
- the basis of the property must be allocated between the portion of the property sold and the portion given to charity
Basis of sale purposes = (Amount realized/ FMV) x Basis of property
What percentage of gain can be excluded if QSBS purchased before Feb 18, 2009
50%
What percentage of gain can be excluded if QSBS purchased after Feb 18, 2009 and before September 28, 2010
75%
What percentage of gain can be excluded if QSBS purchased after September 27, 2010
100%
In order for assets to be taxed at LT gains rate the asset must be held for
- more than one year
What are some events that can cause recognition of gain when a sale has not occurred
- Natural disasters that destroy property
- bankruptcy of a company
The amount realized on the sale or exchange of an asset is the sum of
- Cash received plus
- FMV of property received in the exchange plus
- Liabilities shed
How can the sale of a mortgaged real estate yield phantom income
- usually occurs when the financing is through nonrecourse loans, taxpayer takes large write offs, or the taxpayer disposes of the property subject to the loans
Recognition of gain occurs when
- debt is relieved (excludes debt relief on qualified principal residence after December 31, 2017 through January 1, 2021)
- When money is taken out of an investment as a loan when the individual is not personally liable for the loan and
- with net gifts (donee agrees to pay the gift tax)
Are losses on personal property allowed
no
Is an index for an index subject to wash sale rules
- yes
Wash sale rules apply to losses from sales or trades of
- contracts and options to acquire or sell stock or securities
- do not apply to losses from sales or trades of commodity futures contracts and foreign currencies
Preferred stock is substantially identical to the common stock if the preferred stock is
- convertible into common stock
- same voting rights as the common stock
- subject to the same dividend restrictions
- trades at prices that do not vary significantly from the conversion ratio and
- is unrestricted as to convertibility
A taxpayer realizes a gain on the disposition of personal residence that resulted from casualty, theft, or condemnation (involuntary conversion) the gain may be either
- Deferred under section 1033 or
- excluded under section 121 (subjected to limitations)
What are the qualification requirements for the exclusion under Section 121 ($250,000 gain exclusion)
- property must have been owned and occupied as a principal residence for 2 out of the last 5 years
- exclusion can only be used once every two years
- any appreciation during non qualified use periods are not subject to the exclusion
How much can be excluded under section 121 for single and MFJ taxpayers
- single $250,000
- MFJ $500,000
What are the requirements for MFJ to meet section 121 exclusion requirments
- both must meet the use requirement and not have utilized the exclusion within the last two years
- either may meet the ownership requirement
A reduced 121 exclusion will apply if the sale of the personal residence is due to
- change in employment
- qualified move for you or your spouse
- change of health
- other unforeseen circumstances
- fairly broad (not likely to be tested)
What is the reduced exclusion ratio for 121 based on
- the period of ownership between the last sale and the current sale (pro rata)
A loss resulting from a worthless security is deductible in
- the year in which the securities become completely worthless
- Section 165 sets the artificial sale date for the securities as the last day of the year in which the securities become worthless
Property Type: Personal Use
Gain:
Loss:
- Gain: ST or LT capital depends on holding period
- Loss: Losses may not be recognized or deducted
Property Type: Capital Asset
Gain:
Loss:
- Gain: ST or LT capital depends on holding period
- Loss: Capital loss (limited to extent of gain plus $3,000)
Property Type: Trade or Business
Gain:
Loss:
- Gain: ST or LT capital depends on holding period
- Loss: Ordinary loss
Property Type: Trade Ordinary Income
Gain:
Loss:
- Gain: Ordinary income
- Loss: Ordinary loss
What are the steps to determine the net capital gain or loss
- First net LT
- Second net ST
- Third net LT with ST
How long can a capital loss be carried forward
indefinitely
Under section 1244 single taxpayer can deduct up to ______ of the loss as ______ loss in any given year if the following requirements are met
- $50,000 (MFJ $100,000)
- Ordinary loss
- Stock represents ownership in a domestic corporation
- corporation was a small business corporation at the time stock was issued (less than $1 mill)
- issued to the original owner in exchange for money or property (Services do not count)
- 5 years prior to the loss the corporation must have earned more than 50% of its gross receipts from sources other than royalties, rent, dividends, interest, annuities, and capital gains
Does section 1244 apply to gains
no
How is excess loss over the 1244 limit treated
- capital loss in the current year
What is section 267 disallow
- losses from direct or indirect sales or exchanges of property between related parties
- does not apply to gains
Who is a related party for section 267 and who is not
Related:
- Siblings
- lineal descendants
- ancestors
- spouse
Nonrelated:
- in laws
- aunts/uncles
- cousins
When a taxpayer disposes of a business asset the gain is usually a
Section 1231 gain or loss
When a taxpayer dispose of depreciable property (1245 or 1250) at a gain the taxpayer may have to recognize all or part of the gain as
- Ordinary income under depreciation recapture rules
- any remaining gain is 1231 gain
Depreciable or real property used in a trade or business is a
- Section 1231 asset
To be classified as a 1231 asset the owner of the asset must have a
- Long term holding period
- be depreciable real or person property used in a trade or business
Are copyrights owned by the author of the copyright work a depreciable assset
No
What is the benefit of a section 1231 asset
- Gain is treated as LT cap gain
- Loss is treated as ordinary loss
Does a 1231 gain/loss classification help a C corporation
- No to gain because everything is taxed at the same rate
- Yes to loss because capital losses cannot be deducted against other forms of income but ordinary can be
How is a gain on the disposition of Section 1245 property treated
- Ordinary gain to the extent of depreciation
- any gain beyond that is treated as a section 1231 gain
What is considered section 1245 property
- tangible personal person property used in a trade of business
- Patents, copyrights, equipment
(1245 property how is the gain loss classified)
Property sold for an amount equal to its adjusted basis
- no gain/loss
- no depreciation recapture
(1245 property how is the gain loss classified)
Property sold for an amount less than the adjusted basis
- Ordinary loss
- no depreciation recapture
(1245 property how is the gain loss classified)
Property sold for an amount that exceeds the adjusted basis of the property but does not exceed the amount of depreciation taken
- Ordinary gain to the extent of gain
(1245 property how is the gain loss classified)
Property sold for an amount that exceeds the adjusted basis and the gain exceeds the amount of depreciation taken
- Ordinary gain to the extent of depreciation taken
- capital gain for the remainder of the gain
What is the only way to have a 1231 gain on 1245 property
- sell it for more than it was originally purchased for
What is excess 1250 and how is it taxed
- Accelerated depreciation on real estate that is subject to ordinary tax rates
What is unrecaptured 1250 gain
- the straight line deprecation of real estate up to the original basis that is taxed at 25%
What is the 5 year lookback rule
- a net section 1231 gain in the current year will be taxed at the ordinary tax rates to the extent of any 1231 losses claimed in the last 5 years
- forces the tax payer to net 1231 gains and losses over a five year period
What type of property will receive like kind exchange treatment under 1031
real estate
1031 exchange applies to real estate used for property
- productive use in a trade or business or
- as an investment
When like kind exchange treatment is available it is
- mandatory
- taxpayer cannot choose whether to subject the transaction to current tax or defer gain into the future
The exchange properties in a like kind exchange must be
- similar in character and nature
- do not have to be similar in use
- Unimproved realty can be exchanged for improved realty
Can US realty be exchanged for foreign realty
no
When the taxpayer wishes to defer gain under 1031 the taxpayer must
- sale proceeds must be held by an escrow agent
- replacement property must be identified within 45 days
- closing on the replacement property must take place by the earlier of 180 days from the sale of the original property or the due date of the tax return for the year the original property was sold
What is the tax consequence if just two property’s are involved in the exchange
- no tax consequence
- taxpayers basis in the original property and the holding period will carry over to the new property
What happens if boot is received in an 1031 exchange
- gain will be realized in an exchange to the extent of the boot received
What happens if boot exceeds the gain on the property
- non taxable
- treated as a tax free return of basis
Are losses recognized on exchanges involving boot
no
What is the basis of the new property if boot is received
- the basis of the new property is reduced by the amount of the boot
What happens if a mortgage is transferred with the property
- the party transferring the mortgage is treated as having received boot equal to the amount of debt relief
- the party undertaking the mortgage obligation is treated as giving the boot
What are the steps to calculate the income tax consequences of 1031 exchange
- Determine whether your client is trading up or down
- Party trading up recognizes no gain and adds to their old basis any boot/cash given to the other party
- Party trading down will require to recognize gain to the extent of boot received
- If the boot exceeds gain the amount of boot in excess of the gain is treated as a return of capital and reduces the basis in the new asset
- Debt relief is treated as boot requiring gain recognition for the party no longer responsible for paying back the loan
- Party receiving the debt will increase their basis in the replacement property received in the exchange plus the disallowed loss
When are losses realized in a like kind exchange
- are not recognized until the replacement property is sold
- the taxpayers basis in the replacement property equals the FMV of the property received in the exchange plus the disallowed loss
What are the basis adjustments in a like kind exchange
- basis of the property received equals the basis of the property given
- less the amount of any money received by the taxpayer and
- plus/minus the amount of any gain or loss that was recognized on the exchange
What is the calculation of basis in like kind asset received
FMV of New Asset
- Gain not recognized
+ Loss not recognized
= Basis in New Asset
What is the basis in boot received
FMV of property
If boot received does not exceed gain is the basis adjusted
- No basis is the basis of the old asset
- If boot exceeds the gain being deferred the basis is reduced by the remaining boot
(Like Kind Exchange Related Parties)
- If a party disposes of property received within _ ____ both parties are required to recognize any gain/loss that was not recognized in the year of exchange
- 2 years
- recognized as of the date the property is sold
(Like Kind Exchange Related Parties)
- What is a related party
- brother, sister, spouses, ancestors, descendants
- controlled corporation (50% owned by taxpayer)
- corporations that are members of controlled groups
(Like Kind Exchange Related Parties)
- When do related party rules not apply
- Either party dies before the sale occurs or
- taxpayer can demonstrate to the satisfaction of the IRS that avoidance of taxation was not a principal purpose of the sequence of transactions
Are gain or losses recognized when a corporation receives money or property in return for its stok
- no gain or loss is recognized
- 1032 sale of stock is treated as an infusion of capital and is not subject to income tax
What is an involuntary conversion
- the destruction, theft, seizure, condemnation, sale or exchange under threat of condemnation of property
- Associated with eminent domain
What does section 1033 permit
- does not require
- nontaxable treatment of gains if the amount of reinvestment in replacement property equals or exceeds the amount realized
Under Section 1033 replacement property must be
- similar in function or use as involuntary converted property
- acquired within a specified period
- Period starts when involuntary conversion or threat of condemnation occurs
- period ends 2 years (3 years for condemnation of realty) from the year end of year that gain is realized
What is replacement property defined as under 1033 for business or investment real estate
- same as like kind exchanges
What is replacement property defined as under 1033 under function use test for owner users
- requires the replacement property to serve the same functional use as the original property
What is replacement property defined as under 1033 under taxpayer use test for owner investors
- taxpayer use test requires the replacement property to be used by the taxpayer in a similar activity as the original property
What is a 1035 exchange
- provides for tax free exchange of some insurance policies
An ordinary life insurance contract may be exchanged for
- life insurance contract on the same individual
- an endowment or annuity contract
An endowment contract may be exchanged for
- an endowment policy with payments beginning no later than the date payments would have been made under original contract
- an annuity contract
An annuity contract can be exchanged for
- another annuity contract fixed or variable on the same person
- cannot be exchanged for life insurance or an endowment
Are losses from the sale or surrender of an insurance policy deductible
no
Are transfers between spouses as an incident of divorce taxable
- no
- carryover basis applies to the property transferred
When must a transfer occur to be treated as an incident of divorce
- within one year of the date on which the marriage legally ended and is related to the cessation of the marriage
