Property Transactions Flashcards
What is the basic calculation for basis in property?
Basis =
Cost of property + Purchase expenses + Debt assumed + Back taxes & interest paid
Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.
What is the recipient or donee’s basis on Gifted Property?
Sold at
Gain: use Donor’s Basis
Loss: use lesser of Donor’s Basis or FMV on date of distribution
Sold in between Donor’s Basis & FMV: No Gain or Loss
What is the basis and holding period of Inherited Property?
** Date of Death: FMV **becomes basis or
Alternate Valuation Date: earlier of 6 months after death or** Distribution / Sale Date**
If the Alternate Valuation Date is elected the asset is valued using FMV at the earlier of:
- Distribution Date of Asset
- Alternate Valuation Date ( earlier of 6 mos. or Sale Date)
Inherited Property is Long Term Capital Gain (LTCG) regardless of how long it is held by the recipient.
What is the holding period on a Stock Dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What property is eligible for “like-kind” exchange treatment?
Real Property (used in a business or investment) for Real Property (regardless if property is improved / unimproved) or;
Personal Property for other Personal Property with same general use (i.e. in the same asset class).
“Like-kind” if property is same nature or character, even if property differs in grade or quality.
Real & Personal Property predominately used in US compared to property predominately used outside US are not “like-kind”.
What is BOOT in a like-kind exchange?
Boot received = Cash received + FMV of non-like-kind property received + Net relief from liability (i.e. liability passed to other party)
Boot Paid = Cash Paid + FMV of non-like-kind property paid + Net Liability assumed
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received Ignore the boot paid amount from the mortgage completely
What is an involuntary conversion? When does it not result in a gain?
When you receive $ for a involuntarily conversion of property (e.g. destruction, theft, condemnation)
No Gain if 100% of proceeds reinvested (basis is same as old asset)
If proceeds not 100% reinvested within 2 years for Personal Property and 3 years for Business Property: Gain is lesser of:
Realized Gain or Amount not reinvested.
(Basis = Cost - Gain not recognized)
What are the requirements for exclusion of gain on sale of the taxpayer’s personal principal residence?
How are losses treated?
Must have owned and used the property as a principal residence for 2 years or more out of last 5 years. (Periods of ownership and use can be different). Only 1 spouse must meet “Ownership” requirement. but both must meet the “Use” requirement.
$500,000 exclusion for Married Filing Jointly
$250,000 for Single, Married Filing Separately, Head of Household
Loss on sale of home is NOT deductible
What is a Wash Sale?
Wash Sale Loss is disallowed for tax purposes. Exists when stock / bond is sold for loss & repurchased within 30 Days before or after sale date.
Basis Repurchased Stock = Purchase Price of New Stock + Disallowed Wash Sale Loss
or;
Old Stock Basis - Proceeds from Sale + New Stock Purchase Price
Date of Acquisition is Date of Acquisition of Old Stock
Who is considered a related party in a property transaction? How does it affect the transaction?
- Brothers and Sisters (In-Laws are not related party)
- Husband or Wife
- Lineal Descendants (Father, Son, Grandfather)
- Entities that are more than 50% owned by Individuals, Corporations, Trusts and/or Partnership
Gain is always recognized. Losses are disallowed on (most) related party sales. Disallowed loss is used once asset is sold and recognized only to the extent that the future sale price is lower than the acquiring relative’s purchase price (FMV).
Related party’s holding period begins when property is acquired.
How are Net Capital Losses taken in a C corporation?
Corporations may not deduct any capital loss from Ordinary Income. Only use Capital Losses against Capital Gains.
Net Capital Losses are carried back 3 years and forward 5 years as Short Term Capital Loss
if you elect NOT to carryback; you lost the option in the future
What assets are NOT capital assets?
Inventory or property held for sale to customers in ordinary course of business
Depreciable Personal Property & Real Estate used in a trade/business (e.g. Section 1231, 1245, 1250 Property)
Accounts Receivable
Copyrights, literary, musical / artistic compositions held by the original artist (sale of musical compositions by original artist is treated as a Capital Gain)
Treasury Stock
*However, Goodwill is a Capital Asset
What are the steps in applying a capital gain or loss for Individual?
Net all STCG and STCL Net all LTCG and LTCL
$3,000 Maximum Deduction (MFJ) reduced to $1,500 if MFS
How much ordinary income can be offset by an INDIVIDUAL’s capital losses?
$3;000 maximum deduction per year (MFJ). $1,500 for MFS.
Capital Losses are limited to taxable income before personal exemptions.
Excess net Capital loss if unused is carried forward for an unlimited time until exhausted. Maintains characters as long-term or short-term in future years.
No carryback of capital losses is allowed for Individuals. Carryforward forever.
Which property is governed by section 1231?
1231 property includes depreciable property and real property (e.g. Buildings & Equipment) used in a trade or business and held for more than 1 year. includes property that was lost in an involuntary conversion (theft, natural disaster, etc.)
Timber, coal or domestic iron ore, and some types livestock are also covered.
Does not include: inventory, property held for sale in ordinary course of business, artistic creations held by their creator, government publications
How are section 1231 gains and losses handled?
Net Section 1231 Losses (Section 1231 Losses - Section 1231 Gains) are treated as ordinary losses.
There are no Section 1245 or 1250 Losses.
Section 1231 provides a special benefit by allowing Long-Term Capital Gain (LTCG) treatment (Tax Rates of 0%, 15%, or 20%) on Net Section 1231 Gains from sales, exchanges, or involuntary conversions of certain “noncapital” assets.
1231 Net Loss: If losses exceed gains then treat as Ordinary Loss
1231 Net Gain: If gains exceed losses then LTCG
How is section 1245 depreciation recapture handled; and when does it apply?
To the extent of depreciation; treat as ordinary gain Remainder is 1231 gain; which is LTCG - There are no 1245 Losses
1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG
1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary
What property qualifies for section 1250 treatment; and how are gains/losses handled?
1250 property is Real Estate that is not 1231 Property Use 1250 for Gain only. For losses; use 1231 Individuals: Post-1986 property with a gain is 1231 LTCG If Straight Line depreciation is used; don’t use 1250 - Entire gain is 1231 Corps: Section 291 requires 20% of depreciation classified as ordinary gain Remainder is 1231 LTCG
When are 1231; 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
