Property Transactions

Question 1

How does one determine the basis of gifts?

Answer 1

1. Gain basis = donor’s adjusted basis;
2. Loss basis is the lower of gain basis or FMV;
   Depreciable basis = gain basis.

Question 2

Define “Long Term Holding Period.”

Answer 2

More than 1 year.

Question 3

How does one determine the basis of inheritances?

Answer 3

Fair market value on date of death or alternate valuation date (as selected by the executor of the estate);

Question 4

Define “return on capital.”

Answer 4

The cost of goods or property sold is recovered before any gain is realized.

Question 5

Define “capital assets” and list the two most common categories of capital assets.

Answer 5

Assets other than inventory, accounts receivable, notes receivable, assets used in a trade or business or creative works (in the hands of the creator).
Two common categories are assets used in one’s personal life and investments.

Question 6

Define “Section 1231 assets.”

Answer 6

Realty and depreciable property used in a trade or business owned more than one year.

Question 7

What is the ordinary loss deduction limit on the sale of a worthless small business stock?

Answer 7

$50,000 ($100,000 if married filing joint).

Question 8

List the qualified small business stock exclusion of gain requirements.

Answer 8

Stock held for more than five years after initial issuance;

Stock from active corporation with assets less than $50 million.

Question 9

What is the net capital loss limit for individuals?

Answer 9

The loss limit is $3,000.

Question 10

What is the percentage of qualified small business exclusion of stock gain?

Answer 10

50% (increased to higher levels for certain temporary periods).

Question 11

Describe the elements of the net capital loss deduction for individuals.

Answer 11

Deductible up to $3,000 per year;
For AGI;
Also limited to taxable income;
Excess loss carries forward; no limit on carryforward period.

Question 12

List the characteristics of ordinary loss deduction on sale of worthless small business stock.

Answer 12

Corporation issued stock for less than $1 million;
Corporation must conduct an active business;
Taxpayer received stock from corporation in initial offering.

Question 13

What is the maximum tax rate for capital gains from the sale of collectibles?

Answer 13

The maximum rate is 28%.

Question 14

How can corporations use their capital loss deduction?

Answer 14

Can only use capital losses to offset capital gain net income; no deduction for net capital losses;
Unused losses are carried back three years and forward five years.

Question 15

Define “Section 1245 property.”

Answer 15

All property other than land and buildings

Question 16

What is the maximum tax rate for gain attributable to depreciation claimed on real estate for an individual?

Answer 16

25% for straight line depreciation recapture.

Question 17

What depreciation is subject to recapture under Section 1245?

Answer 17

All depreciation claimed

Question 18

What depreciation is subject to recapture under Section 1250?

Answer 18

Excess depreciation (depreciation claimed over straight-line).

Question 19

What is the period of time that lookback rules apply to Section 1231 gains?

Answer 19

5 years.

Question 20

Under what circumstances must a convention other than the mid-year convention be used for all personalty?

Answer 20

A mid-quarter convention is used for all personalty if more than 40% of personalty is purchased in last quarter of the year.

Question 21

What is the class life for realty?

Answer 21

39 years for nonresidential; 27 1/2 years for residential.

Question 22

Define “listed property.”

Answer 22

Assets, such as computers and vehicles (but not cell phones), that are commonly used for business and personal purposes.

Question 23

What is the depreciation method for realty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 23

The depreciation method is straight line.

Question 24

What is the general convention for personalty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 24

The general convention is mid-year.

Question 25

What is the depreciation method for personalty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 25

The depreciation method is double declining balance.

Question 26

Describe the business use test for listed property.

Answer 26

Business use must exceed 50% of total use;
Business use is limited to use in the trade or for the convenience of the employer;
Failure to meet business use means cost recovery limited to straight line;
But note that business and investment use can be depreciated.

Question 27

What is the general convention for realty under the Modified Accelerated Cost Recovery System (MACRS)?

Answer 27

The general convention is mid-month.

Question 28

What types of assets are eligible for Section 179 expensing?

Answer 28

Tangible personalty used in a trade or business.

Question 29

Define “involuntary conversion.”

Answer 29

The result of a casualty (an unexpected, unavoidable outside influence like a storm, fire, shipwreck, a theft, or a condemnation).

Question 30

Is realty considered like-kind property?

Answer 30

All Realty is considered to be like-kind; so land is like-kind with a building.

Question 31

What are the key differences between like-kind exchange and involuntary conversion rules?

Answer 31

Like-kind exchange rules are mandatory but involuntary conversion rules are elective. Like-kind exchange rules apply to gains and losses but involuntary conversion rules apply only to gains. Type of replacement property under involuntary conversion rules is narrower than like-kind property.

Question 32

List the qualifying property for like-kind exchanges.

Answer 32

Business or investment property;
Not inventory or receivables;
Must be “like-kind;

Question 33

What is the replacement period for involuntary conversions (except for condemned-business realty)?

Answer 33

The replacement must be made within two years from END of tax year in which the gain is realized.

Question 34

List the requirements for deferral due to involuntary conversion.

Answer 34

Disposition qualifies as involuntary conversion;
Must replace property with property similar or related in service or use;
Must be made within two years from end of tax year of conversion (three years in the case of condemnation or threat of condemnation of real property held for productive use in a trade or business or for investment);
Any proceeds not reinvested in qualifying property create gain.

Question 35

What is the adjusted basis of replacement property after involuntary conversion?

Answer 35

Cost reduced by any deferred gain.

Question 36

What are the requirements for the $250,000 exclusion on sale of a residence rule?

Answer 36

Frequency test;
Ownership test;
Use test.

Question 37

Who is considered to be a related party for individuals for the loss disallowance rule?

Answer 37

Brother, sister, spouse, ancestors, and descendants.

Question 38

What is the gain on the sale of residence exclusion rule?

Answer 38

A taxpayer may exclude gains up to $250,000 ($500,000 joint return) on the sale of residence.

Question 39

Describe the principal residence-ownership test.

Answer 39

The taxpayer must have owned the residence for at least two of the preceding five years. For marital exclusion both must have used the residence but only one had to own it.

Question 40

Describe the principal residence-frequency test.

Answer 40

The exclusion is available no more frequently than every two years; limited exceptions.

Question 41

Describe the wash-sale rule.

Answer 41

Losses from the sale of securities are not recognized if similar securities are purchased 30 days before or after the sale.

Question 42

Describe the principal residence-use test.

Answer 42

The residence is used by taxpayer as a principal residence for at least two of the preceding five years.