Property Taxation-Lesson 1 Flashcards
All assets are capital assets except
ACID!
- Accounts and notes receivable
- Copyrights and creative works
- Inventory
- Depreciable property used in trade or business (Sec 1231 asset)
Assets that are no capital assets are ordinary income assets
Basis for inherited property is ALWAYS
long term
General rule for gifted property
donee’s basis in the gifted property is the SAME as the donor’s basis
First exception of gifted property
occurs when the FMV of the gifted asset is less than the donor’s basis (loss property)
The basis of the donee is the FMV of the property on the date of the gift, Double Basis Rule used
For gains –> basis of donor= basis of donee
For losses–> basis of donee is the FMV of the prop on the date of the gift
If sold by donee at amount between FMV at the time of gift and basis of donor–> no gain or loss
Second exception of gifted property –> when gift tax is paid and the asset appreciated in the hands of the donor, what’s the formula?
The donee’s basis is determined using the following formula:
Donor’s basis + [(net appreciation in the value of gift/ value of taxable gift) x gift tax paid ]
what’s the holding period of gifted property?
general rule –> the holding period in the hands of the donee includes the holding period of the donor
if double basis asset (FMV< donor’s basis) is sold for a loss , then the holding period for donee starts on the date of the gift
What are disallowed losses (no tax deduction) for income tax purposes?
- losses generated on the sale of property that used for personal purposes(i.e. personal residence)
(will never be deductible and will result in a permanent loss of capital)
-losses on wash sales are also disallowed
What is a wash sale?
when a taxpayer disposes a security at a loss and acquires a substantially identical security within 30 days or after the date of a loss sale. Wash sale impacts cost basis! (cost basis goes up)
Ex: Buy stock for $100. Then the stock falls to $10 so you sell on Dec 20, in order to recognized a $90 loss. Then on Jan 3 you decide to buy the stock again at $31.
2 consequences - First, may not recognize the loss due to wash sale. Second, new basis is $31 plus the loss $90. = $120 basis.
What would be considered an identical security for wash sale rules to apply?
index fund for index fund - wash sale rules apply
NOT index fund for managed large cap fund
Under what circumstances a reduced exclusion will be available due to a sale off personal residence that does not meet the requirements (i.e. 2 year requirement)?
- Change in employment
- change of health
- when reduced exclusion is available–> pro rate. (ex. personal residence for 18 mo for married couple. $500K x 18/24= $375k exclusion. )
- any appreciation during non-qualified use periods are not subject to exclusion (i.e. renting out the property for a year –> pro rate to exclude one year)
What are the limitations on recognizing capital losses?
up to $3k of capital losses may be recognized against other forms of income
what is a Section 1244 stock?
Single taxpayer can deduct up to $50k ($100k for married) of a loss on small business stock as an ordinary loss in any given year (requirements apply)
Do you take losses if you sell/exchange securities with a related party? (ie. siblings, children, parents, spouse)
No, Section 267 disallows losses from sales or exchanges between related parties.
Related parties do not include in laws, aunts/uncles, cousins
What is a Sec 1231 asset?
- A depreciable or real property used in a trade or business
- must have long term holding period for it to be depreciated
- ex. Timer, coal, same sex livestock (depreciable)
- gains are treated as long term capital gains tax rate (benefit)
- losses will not be subject to the limitations that typically apply to capital assets (other benefit)
If individual –> generates gains –> favorable lower capital gains rate (currently the 15% or 20%) will apply.
If individual corporation –> generates loss–> write off loss w/o limitation
If loss categorized as capital loss (not sec 1231 loss)–> $3k loss limit applies
C Corporations–> pay the same rate on ord. inc and cap gains (no benefit)
If a corp. generates a sec 1231 loss–> ordinary loss, and may be deducted in full against other income
What is a Sec 1245 asset?
- property treated as ORDINARY income if there is a gain from sale, to the extent of depreciation allowed
- property that has been depreciated, used in business (i.e. equipment)
- Note that real property (ie. land and buildings) NOT sec 1245 prop
** the only way to have a Section 1231 gain on a Sec 1245 prop is to sell it for more than it was org purchased for. Therefore, only when the sale price exceeds the original purchase price will there be a Sec 1231 gain.
