Property Transactions

Question 1

What is the basic calculation for basis in property?

Answer 1

Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.

Question 2

What is the recipient or donee’s basis on gifted property?

Answer 2

Sold at a gain: use donor’s basis

Sold at a loss: use lesser of donor’s basis or FMV at time of distribution

Sold in between donor’s basis and FMV: No gain or loss

Question 3

What is the basis and holding period of inherited property?

Answer 3

FMV at date of death or alternate valuation date (6 months later)

If alternate date is elected by property is sold before 6 month window; use FMV at date of death.

Property inherited is LTCG property regardless of how long it is held by the recipient.

Question 4

What is the holding period on a stock dividend?

Answer 4

Holding period of new stock received from a dividend takes on the holding period of the original stock

Question 5

What property is eligible for like-kind exchange treatment?

Answer 5

Real for real or personal for personal business property only

US property only

Question 6

What is BOOT in a like-kind exchange?

Answer 6

Cash received + unlike property received + liability passed to other party

Question 7

In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?

Answer 7

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

Question 8

What is an involuntary conversion? When does it not result in a gain?

Answer 8

Occurs when you receive money for a property involuntarily converted

There is no gain if you reinvest the proceeds completely

If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.

Question 9

What are the requirements for exclusion of gain on a primary residence? How are losses treated?

Answer 9

Must live there 2 out of 5 years

Loss on sale of home is NOT deductible

Question 10

What is a wash sale?

Answer 10

30 Day rule applies

Disallowed loss adds to basis of new stock

New stock takes on date of acquisition of old stock

Question 11

Who is considered a related party in a property transaction? How does it affect the transaction?

Answer 11

Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder

Seller cannot take a loss on sale to a related party; but gain is always recognized.

Related party gets to use the disallowed loss when they sell.

Related party’s holding period begins when they acquire the property.

In-laws are NOT related parties.

Question 12

How are capital losses taken in a corporation?

Answer 12

capital losses only offset capital gains

Carryback 3 years - if you elect NOT to carryback; you lost the option in the future

Carry forward 5 years - only as STCL

Question 13

What assets are NOT capital assets?

Answer 13

Inventory; Business interest; Accounts Receivable; Covenant not to compete

Goodwill IS a capital asset

Question 14

What are the steps in applying a capital gain or loss?

Answer 14

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3;000

Question 15

How much ordinary income can be offset by an INDIVIDUAL’s capital losses?

Answer 15

$3;000 per year. Unused is carried forward and taken $3;000 each year.

No carryback is allowed.

Question 16

Which property is governed by section 1231?

Answer 16

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

Question 17

How are section 1231 gains and losses handled?

Answer 17

Casualty Losses on 1231 Property - Net the losses

• Net Loss = Ordinary Loss
• Net Gain = Combine with other 1231 Gains

1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss

1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG

1231 Gain = LTCG

1231 Loss = Ordinary Loss

Question 18

How is section 1245 depreciation recapture handled; and when does it apply?

Answer 18

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

Question 19

What property qualifies for section 1250 treatment; and how are gains/losses handled?

Answer 19

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

Question 20

When are 1231; 1245 and 1250 gains or losses always ordinary?

Answer 20

When the asset is held less than one year.

Question 21

qualified acquisition indebtedness

Answer 21

Is debt that is incurred in acquiring, constructing, or substantially improving the principal or second residence of the taxpayer and is secured by such property. Construction loans and real estate acquisition loans can be “rolled” into a first mortgage if strict adherence to the required time frame is maintained.

Max Interest Exp that can be deducted is based on loan limit of $1M ($500 if married filing separate)

Question 22

residential lease requirements

Answer 22

is not required to be in writing in most cases, but when a writing is included the document should at least contain a basic description of the leased premises. The document need not include a statement as to the due date for the payment of rent. The common law will presume that rent is due at the end of the term or period of tenancy unless otherwise agreed.

Question 23

The General Business Credit (IRC Section 38(b)) is a combination of?

Answer 23

a combination of several tax credits to provide uniform rules for the current and carryback/carryover years

Question 24

When should a corporation make estimated tax payments?

Answer 24

Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation’s tax year. Installment payments are required if the estimated tax is $500 or more.

If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.

Question 25

Personal holding company

Answer 25

“Personal holding company” is a term used in relation to federal income tax to denote a corporation that is majority-owned by a small group of natural persons. It is commonly called an “incorporated pocketbook.”

A personal holding company is defined by IRC Section 542 as a corporation that is as follows:

Derives at least 60% of its gross income (after certain adjustments) from investments (dividends, interest, rents, royalties) and from certain personal service contracts
With stock that is more than 50% owned by five or fewer individuals.

They are allowed a deduction for both actual paid dividends and consent dividends.

Question 26

What deduction(s) is (are) allowable in determining the decedent’s taxable estate

Answer 26

In computing the taxable estate for estate tax purposes, a deduction is allowed for bequests to charitable organizations, and there is no percentage limitation.

A deduction is also allowed for funeral expenses, reducing the taxable estate.

Question 27

what rate should capital gains be taxed?

Answer 27

Long-term capital gains are taxed at a maximum of 15% for sales after May 5, 2003, except that individuals in the 39.6% bracket would be taxed at a maximum of 20%. (For taxable years 2007 to 2015, for long-term capital gains that would otherwise be taxed in the 10% or 15% bracket, the maximum rate is 0%.)

Question 28

What is earned income tax credit (EIC)?

Answer 28

The earned income tax credit (EIC) is a refundable credit available to qualifying low-income taxpayers. The amount of the EIC is based on a percentage of earned income and the number of qualifying children the taxpayer supports (0, 1, 2, or 3 or more), with the income limits changing depending on how many qualifying children a taxpayer has.

When determining whether a child is a qualifying child for purposes of computing the EIC, the support test is not included, and the relationship, residency, and age tests are modified (see Dependent). The refund decreases as earned income rises after reaching a given amount.

In order to be eligible for the earned income credit, a taxpayer must have an AGI below a certain level, a valid Social Security number, a filing status other than married filing separately, a U.S. citizen or resident alien designation, no foreign income, and limited investment income.

Question 29

When is a charitable contribution deduction on an estate’s fiduciary income tax return is allowable?

Answer 29

An unlimited charitable contribution deduction is allowed for an estate if the contribution is provided for in the will of the decedent, the charity is a qualified charity, and if the contribution is paid in the year of deduction or the year following the deduction.

There are no other limits on the charitable contribution deduction of an estate.

Question 30

What is the percentage depletion rate allowed by the Internal Revenue Code for the recovery of capital invested?

Answer 30

5% for Mining Clay
10% for Mining Coal
15% for Gold, Silver, copper and iron ore.

Question 31

Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?

Answer 31

12 months

Question 32

For income tax purposes, the estate’s initial taxable period for a decedent who died on October 24:

Answer 32

Income earned by an estate is subject to income tax. Generally, income of the decedent up to the date of death is reported on the final Form 1040. Income earned after death is reported by the estate’s fiduciary on Form 1041. An estate may adopt either a calendar year or fiscal year. Trusts, on the other hand, must use a calendar year. (IRC Section 644)

Question 33

Gross negligence (constructive fraud)

Answer 33

is the extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements. There need not be actual intent to deceive (scienter). Ordinary negligence is a lesser offence than gross negligence. There is no necessity to identify any third-party users.

Question 34

The federal estate tax may be reduced by a credit for:

Answer 34

• (unified) tax credit—the maximum amount is $2117,800 for 2015, which is equivalent to $5,430,000 worth of property in 2015. The estate tax was reinstated in 2011 by the Tax Relief Act of 2010 and made permanent by the Taxpayer Relief Act of 2012.
• federal gift taxes paid on gifts included in the donor-decedents’ taxable estate. Only taxable gifts made before 1976 are added to the donor’s taxable estate.
• A credit is allowed against the federal estate tax if a person inherits from someone who also paid a federal estate tax and died within the prior 10 years (credit for tax on prior transfers).
• A credit is allowed for foreign death taxes paid.

Question 35

What is the maximum allowable traditional IRA deduction?

Answer 35

The maximum annual contribution allowed has been increased to $5,500 for 2015 with an additional $1,000 contribution allowed for taxpayers age 50 and over.

Question 36

What is an express Trust?

Answer 36

An express trust is created when funds or property are distributed to a trustee. The trustee holds the funds or property for the recipient. The express trust must generally fulfill the requirements within the legal trust.

Question 37

What is a Remainderman in a Trust?

Answer 37

The people or organizations that receive the property at death of original person that inherited the property

Question 38

The Small Tax Case Appeals is

Answer 38

is a simplified and informal option that is available to a taxpayer within the structure of the Tax Court. The taxpayer can request and, with the Tax Court’s approval, have the case conducted under the simplified small tax case procedures. To qualify for this appeal procedure, the tax dispute cannot exceed $50,000 for any one tax year.

Question 39

The method used to depreciate partnership property is an election made by:

Answer 39

the partnership and may be any method approved by the IRS.

Question 40

Schedules L, M1 and M2 filing requirements

Answer 40

if their total assets at the end of the taxable year and the corporation’s total receipts for the tax year are more than $250,000

Question 41

Schedules M3 filing requirements

Answer 41

Corporations with assets of $10 million or more must use Schedule M-3 instead of M-1.

Question 42

What is the Applicable Credit (Unified Credit)?

Answer 42

It is defined as a credit that allows donors and decedents to transfer a limited amount of property without being subject to the gift or estate tax. For 2015 the unified credit is $2,117,800, which exempts $5,430,000 in 2015 in transfers from the gift or the estate tax.

Question 43

Research and Experiments Expenses

Answer 43

These may be amortized over 60 months or longer. However, the taxpayer can choose to deduct the cost in the first year in which they are paid or incurred.

Question 44

Individuals may generally avoid the penalty for failure to pay estimated tax for 2015 by:

Answer 44

paying at least 90% of the tax shown on the current year’s return,
paying 110% of the tax shown on the prior year’s return (for individuals with AGIs of more than $150,000 in the previous year), or paying installments on a current basis under an annualized income installment method. An individual may not use the 100%-of-prior-year’s-tax safe harbor if the prior year was not a 12-month period or if the individual did not file a return for such preceding taxable year.

Question 45

Dividends-Received Deduction (DRD)

Answer 45

*A corporation may deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the distributing domestic corporation.
* A corporation may deduct (within certain limits) 80% of the dividends received if it owns 20% or more, but less than 80%, of the paying domestic corporation.
A corporation may deduct (within certain limits) 100% of the dividends received if the corporation receiving the dividend owns more than 80% of the distributing domestic corporation.

Question 46

Alternative Minimum Tax (AMT) Exemption

Answer 46

The 2012 American Taxpayer Relief Act provides permanent alternative minimum tax (AMT) relief. The AMT exemption amounts (retroactive to January 1, 2012) are in the table below.
For tax years beginning after 2012, these exemptions are indexed for inflation.
2015
——-
Corporate taxpayers $40,000
Ind: MFJ $83,400
Ind: S & HOH $53,600
Ind: MFS $41,700
Estates and trusts $23,800
The AMT exemption is phased out for taxpayers with high amounts of alternative minimum tax income (AMTI).

Question 47

Alternative Minimum Taxable Income (AMTI)

Answer 47

The alternative minimum taxable income (AMTI) is used to arrive at the alternative minimum tax (AMT). Generally, AMTI starts with the taxpayer’s taxable income. To this amount, the individual taxpayer adds preference items and adds or subtracts adjustments to arrive at AMTI. A corporate taxpayer adds preference items, adds or subtracts adjustments, and subtracts any alternative minimum tax net operating loss (AMTNOL) deduction to arrive at AMTI.

Example
The amount of the reduction of the maximum $40,000 exemption is $15,000. The $40,000 exemption must be reduced by 25% of the excess of AMTI over $150,000

Question 48

Voluntary dissolution of a corporation

Answer 48

occurs when the board of directors passes a dissolution resolution. The officers do not have the authority to dissolve a corporation—only the board of directors does. Amending a certificate of incorporation will not result in the dissolution of the corporation. The stockholders may vote on dissolution, but unanimous consent is not required

Question 49

To what extent is the fee paid to a trustee of a trust deductible on Form 1041?

Answer 49

Indirect expenses of a trust such as trustee fees are considered to apply to all income. The ratio of taxable income to total income (not including income allocated to corpus) is used to determine the deduction.

For example, if a trust had total income of $20,000, of which $15,000 was taxable and $5,000 was tax-exempt interest, then 75% of the trustee fees would be deductible ($15,000 taxable ÷ $20,000 total = 0.75).

Question 50

Uniform Inventory Capitalization (UNICAP)

Answer 50

The uniform capitalization rules applicable to resellers require that certain indirect costs be capitalized. The indirect costs most often incurred by resellers are purchasing, handling, and storage costs. Handling costs include repackaging costs, and storage costs include off-site storage costs.

Question 51

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate

Answer 51

Upon filing a Chapter 7 bankruptcy proceeding, certain property becomes part of the estate if it is received (or entitled to be received) within 180 days of the filing. This type of property includes gifts, inheritances, various forms of property settlements (including divorce property divisions but not alimony) and life insurance proceeds. Notice the answers included most all of the included items, but had a different time schedule for their receipt. Notice that the time line alone is not controlling.

Via statute, various exemptions exist (up to certain dollar amounts), including such items as limited interests in homeowners equity, motor vehicles, household goods, tools of the trade, health aids, personal injury claims, alimony, and certain pension benefits. Finally, the bankruptcy statute specifically excludes Social Security payments.