Property Transactions

Question 1

What are the three mutually exclusive categories of assets?

Answer 1

Ordinary assets, Section 1231 assets, and capital assets

Question 2

Give examples of ordinary assets.

Answer 2

• Inventory, A/R, and notes receivable
• Depreciable property used in a trade/business and realty that have been owned for one year or less
• Copyrights, musical, artistic, and literary works (if held by the person who created the work …. a composer can elect to have his or her musical work treated as a capital asset)

Question 3

Give examples of Section 1231 assets.

Answer 3

Depreciable property used in a trade/business and realty that have been owned for more than a year. Section 1231 assets include realty and depreciable property but exclude capital assets, inventory, A/R, copyrights, etc.

Question 4

Give examples of capital assets.

Answer 4

• By exclusion - assets not included as ordinary and Section 1231 assets.
• Most other types of property, including property held for investment use and personal use, are capital assets.
• Goodwill for a corporation.

Question 5

When must a realized gain or loss be computed?

Answer 5

A realized gain or loss must be computed any time there is a sale or disposition of the property.

Question 6

What constitutes a sale or disposition?

Answer 6

Sales, exchanges, trade-ins, casualties, condemnations, thefts, and retirements.

Question 7

How is a realized gain or loss computed?

Answer 7

Amount Realized
- Adjusted Basis
= Realized Gain/Loss

Question 8

How do you compute the amount realized?

Answer 8

This is a four-step process:

• Cash received
• Fair market value of any property and services received
• Liabilities assumed by the buyer
• Less selling expenses

Question 9

How is the adjusted basis calculated?

Answer 9

This equals the cost or other acquisition basis of the property (includes any liabilities or expenses

+ capital improvements
- depreciation, amortization, and depletion

Question 10

What is the difference between realized gain/loss and recognized gain/loss?

Answer 10

A recognized gain/loss is the amount of realized gain/loss that is included in the taxable income of the taxpayer.

Question 11

What happens to non-recognized gains/losses?

Answer 11

Not all gains/losses will be recognized. If not recognized, they are either excluded or deferred. The recognized gain/loss will never exceed the realized gain/loss.

Question 12

How is gift basis determined?

Answer 12

Gain = Adjusted basis of the donor
Loss = Lower of FMV at date of gift or adjusted basis of the donor
Depreciable basis = gain basis
The basis is increased for the portion of any gift tax paid by the donor due to appreciation in the property.

Question 13

Explain the holding period rules for gifted property.

Answer 13

If gain basis is used - holding period of the property for the donee includes the holding period of the donor.

If loss basis is used - holding period of the donee begins on the date of the gift.

Question 14

When is the valuation date for property acquired from a decedent?

Answer 14

Date of death or on the alternate valuation date (six months after the date of death)

Question 15

Explain the basis and holding period rule for inheritances.

Answer 15

Basis - FMV at date of death or alternate valuation date. Use FMV on date of disposition if alternate valuation is elected and property is distributed, sold, or otherwise disposed of during the 6-month period following death.
Holding period is deemed to be long-term.

Question 16

Explain the basis rules for property converted from personal to investment/business use.

Answer 16

Gain basis = Adjusted Basis
Loss basis and depreciable basis = Lower of adjusted basis or FMV at date of conversion.
(Prevents nondeductible personal losses from being converted into a business loss)

Question 17

What is a net short-term gain or loss?

Answer 17

The accumulation of all short-term capital gains and all deductible short-term losses.

Question 18

What is a net long-term gain or loss?

Answer 18

The accumulation of all long-term capital gains and all deductible long-term losses.

Question 19

What is a net capital loss? What is the yearly limit? Is if for or from AGI?

Answer 19

When the combination of net short-term and net long-term gains and losses is negative. $3,000 per year. For AGI.

Question 20

What is net capital gain?

Answer 20

The portion of capital gain net income (if any) that is eligible for a reduced tax rate. Short-term capital gain is taxed at ordinary income.

Question 21

What is the maximum tax rate for a net capital gain attributable to straight-line depreciation?

Answer 21

25%

Question 22

What is the maximum tax rate for a net capital gain attributable to collectibles?

Answer 22

28%

Question 23

What is meant by a maximum preferential rate?

Answer 23

The preferential rates are the maximum rates that will be applied to a source of income. If the ordinary income rate for the taxpayer is less than the preferential rate, then the ordinary rate is used to tax the long-term capital gain.

Question 24

What are the special rules that apply to Section 1244 stock sold by individuals?

Answer 24

Gains from the sale of Section 1244 stock are treated as regular long-term capital gains, but losses are treated as ordinary losses

• maximum of $100,000 married joint or $50,000 others
• seller had to be original holder of the stock

Question 25

What are the special rules that apply to options?

Answer 25

If a taxpayer incurs a loss on an option which he holds to buy or sell property due to the lapse of the option:

• capital loss - if underlying property would be capital
• Section 1231 - if underlying property would be 1231
• ordinary - if underlying property would be ordinary asset

Question 26

What are the rules for corporations?

Answer 26

Use the same netting process, but can only use a net capital loss to offset capital gain net income.

• no deduction if loss exceeds gains
• carry back 3 years and forward 5 years
• carryback and carryforward treated as short-term
• no preferential treatment of capital gains

Question 27

When are worthless securities dated?

Answer 27

Worthless stock are deemed to become worthless on the last day of the tax year. This is important because it may affect the characterization of the loss as either long-term or short-term. Remember, only LTCG are eligible to be taxed at preferential rates.

Question 28

How is short-term capital gains taxed?

Answer 28

As ordinary income.

Question 29

What is recapture? What are the two types?

Answer 29

Recapture means to characterize a portion of a gain attributed to accumulated depreciation as ordinary income. Section 1245 and Section 1250.

Question 30

Explain what Section 1245 Recapture is and Section 1250 Recapture.

Answer 30

Section 1245 Recapture refers to depreciable personalty (assets other than buildings) to the extent of accumulated depreciation.
Section 1250 Recapture refers to depreciable real estate (buildings) of accumulated accelerated depreciation in excess of straight-line.

Question 31

What is the 3.8% net investment income tax rules?

Answer 31

Modified AGI exceeds $250,000 if married filing jointly and $200,000 if single or head of household. The 3.8% tax applies to the lesser of (a) net investment income or (b) the excess of AGI over the AGI threshold.

Question 32

What is qualifying small business stock?

Answer 32

The stock of a small business corporation (less than $50 million in capital) held for more than 5 years. Gains from the sale of qualifying small business stock by non corporate taxpayers are eligible for a 50% exclusion. The maximum gain eligible for exclusion is the greater of 10 times the taxpayer’s basis in the stock or $10 million in aggregate. The remaining gain is taxed at a maximum rate of 28%.

Question 33

What forms are used for sales of capital assets?

Answer 33

Form 8949 and totals transferred to Form 1040 Schedule D

Question 34

Do gains on land held long-term fall under the recapture rules?

Answer 34

No, gains on the sale of land held long-term in a business are always 1231 gains since land is not depreciable.

Question 35

How are Section 1231 gains and Section 1231 losses netted?

Answer 35

Any Section 1231 gain is treated as a long-term capital gain. If section 1231 losses exceed Section 1231 gains, the loss is deductible as an ordinary loss (subject to a loopback limit during the previous 5 years).

Question 36

What is the Section 1231 loopback provision?

Answer 36

Section 1231 gains must be offset by net Section 1231 losses from the 5 preceding tax years that have not previously been recaptured. Gains in these years will be treated as ordinary income.

Question 37

What property is depreciable?

Answer 37

Only business property and income-producing property. Property used for personal purposes and investment assets are not depreciable.

Question 38

What is the midyear convention?

Answer 38

Recovery for personalty is computers as though assets are purchased at mid year, while recovery for realty uses a mid-month convention.