Property Transactions

Question 1

Capital Assets

Answer 1

All property is classified as capital asset unless expressly excluded (see below)

Inventory
Real or depreciable property used in trade or business
AR or NR used in business
Copyrights / Goodwill
Govt. publications acquired at reduced cost.
Transfer of a franchise if the transferor retains significant power

Question 2

Basis

Answer 2

If the FMV of the property is equal to or greater than the donor’s adjusted basis, the donee’s basis is the donor’s adjusted basis at the time the donee received the gift.

Question 3

Holding Period

Answer 3

The basis of property acquired as a gift is generally the same as the basis in the hands of the donor.

Question 4

Sec 179

Answer 4

Sec. 179 property is tangible personal property that is depreciable and is Sec. 1245 property. Since land is not depreciable, it is not Sec. 179 property.

Allows tax-payers to treat up to 250K S 500K MFJ the cost of Sec. 179 property acquired as an expense rather than capital expenditure. This 500,000 is reduced by the amount which exceeds 2,010,000. If machine cost $2,011,000 then can expense $499,000.

Must have lived in residence for 2 years.

However, a pro rata exclusion is available if the sale occurred prior to 2 years, provided the sale was as a result of a qualified hardship, including a change in job locations, health reasons, or other unforeseen circumstances. Therefore, Martha may exclude $187,500 [(18 ÷ 24) × $250,000].

Question 5

Net capital gain

Answer 5

Is the excess of net long-term capital gains over net short-term capital losses.

= NLTCG - NSTCL

Does not include NSTCG

Question 6

Computation of Gain Loss

Answer 6

Computation of Gain / Loss = Amount realized – Adjusted basis

Amount realized = Money received +FMV of other property received +Liability relief - Money or Other Property given up - selling expenses - Liabilities assumed

Question 7

Wash Sales

Answer 7

Occurs when substantially same securities are purchased within 30 days before/after being sold at a loss.

• Loss recognized on wash sale is not recognized.
• See 6.3.78 for a good question

Question 8

Section 1244 Stock

Answer 8

Small business stock held since its issuance, issued for money or other property

Aggregate amount of $ or property is less than $1 million

Up to 50,000 (100,000 MFJ) loss on disposition or worthlessness is ordinary loss.

Taxpayers may exclude 50% of the gain from the sale or exchange of small business stock if the stock was held for more than 5 years.

At exchange- any excess basis over FMV of depreciated property is treated as CL before any other realized loss may be treated as ordinary.

If contribute more capital to 1244 stock then must allocate loss between capital contribution and original basis.

Question 9

Bad Debt

Answer 9

Business Bad Debt is deductible as ordinary loss

Non- business bad debt is treated as a STCL

Question 10

NLTCG

Answer 10

LTCG - LTCL

Question 11

Section 1231

Answer 11

Held greater than 1 year, real/depreciable property used in business. Does not include inventory and personal-use property. Can include land operated as parking lot. However, LAND IS NEVER DEPRECIATED. Taxed as a capital gain!!!

Two types : Section 1245: Depreciable tangible property used in trade or business.

Section 1250: Recapture is limited to the excess of accelerated depreciation over straight line depreciation

Question 12

Netting of 1231 Gains and Losses

Answer 12

Gains >Losses = Treated as long-term capital gain

Losses > Gains = Treated as an ordinary loss.

Question 13

Installment Sales

Answer 13

Installment Sales

Gain = Gross Profit ratio * Payments received in CY

Question 14

Like Kind Exchanges

Answer 14

LKE- No gain or loss recognized unless boot is received (forgiveness of debt too)

Question 15

Sect 1245;

Answer 15

Section 1245: Depreciable tangible property used in trade or business.

Gain realized on disposition of property is recaptured as ordinary income to the extent of the lesser of depreciation taken or realized gain.

If you sell a piece of equipment for 200K that you purchased for 150K, and it has 50K of A/D. the 50K would become ordinary income based on 1245 rule the remaining 50K would become 1231 gain.

Question 16

Basis of inherited property

Answer 16

Is the FMC on the date of death

Question 17

Sale of collectible items

Answer 17

The sale of the antique rug qualifies as a sale of a collectible item. For individuals, capital transactions involving long-term holding periods are grouped by tax rates.
A 28% rate is applied to gains or losses from the sale of collectible

Question 18

If Capital Losses Exceed Capital Gains for Tax Year

Answer 18

the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return

Question 19

The basis of property acquired in a like-kind exchange

Answer 19

Is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized

Question 20

Non-accountable employee reimbursement plan

Answer 20

In a nonaccountable plan, the reimbursements are included in the employee’s gross income, and all the expenses are deducted from AGI (below-the-line-deductions). These expenses are a miscellaneous itemized deduction subject to the 2% floor.

Question 21

Elderly Tax Credt

Answer 21

An individual who has attained age 65 is allowed a credit equal to 15% of the individual’s reduced base amount. For a single individual, the initial base amount is $5,000, reduced by any amounts received as Social Security benefits or otherwise excluded from gross income. The base amount is also reduced by one-half of the excess of AGI over $7,500 (for a single individual).

Question 22

Like Kind Exchange Treatment

Answer 22

Like-kind refers to the nature or character of the property. Real estate for real estate qualifies as a like-kind exchange even if the properties are as different as a rental office building and a parking lot, or even if the properties are located in different states. Stocks (and other securities and debt instruments) are specifically excluded from qualifying for like-kind exchange treatment. Also excluded is the transfer of partnership interests in different partnerships.

Question 23

Long Term / Short Term

Answer 23

For property acquired after 1988, long-term capital gain or loss is the gain or loss from the sale or exchange of a capital asset held for more than 1 year. If the capital gain or loss is not long-term, it is short-term. The holding period of an asset begins on the day after acquisition and includes the disposal date.

If held exactly a year then short term

Question 24

Uniform Capitalization (Unique Items)

Answer 24

Companies subject to the uniform capitalization rules must capitalize any rent that is a direct cost, or an allocable portion of an indirect cost, of property that is produced for business use. XYZ may not deduct the rent paid for the construction equipment because it must be capitalized and recovered through depreciation.

Question 25

1231/1245 Property

Answer 25

Gain on the disposition of Sec. 1245 property is ordinary income to the extent of the lesser of all depreciation taken or gain realized.

The realized gain in excess of the depreciation taken may be treated as a gain from the sale or exchange of Sec. 1231 property

Question 26

Capital Gain net Income

Answer 26

Schedule D is used to report capital gains and losses, and the summary combines the long-term gains (losses) with the short-term gains (losses). When these capital gains and losses all net to a gain, it is called “capital gain net income.”

Question 27

S-Corp Basis:

Answer 27

The adjusted basis of the shareholder’s stock is figured at year end with increases for the shareholder’s pro rata share of all income items, including tax-exempt income, that are separately stated and any nonseparately stated income. Also, all separately and nonseparately stated losses and deduction items decrease the basis of the shareholder’s stock on a pro rata basis.

Question 28

Gift Tax

Answer 28

Sec. 2523 permits a marital deduction when a donor transfers property during the calendar year by gift to a donee who, at the time of the gift, is the donee’s spouse. Sec. 2524