Property Transactions Flashcards
Capital Assets
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
Basis
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.
Holding Period
The basis of property acquired as a gift is generally the same as the basis in the hands of the donor.
Sec 179
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].
Net capital gain
Is the excess of net long-term capital gains over net short-term capital losses.
= NLTCG - NSTCL
Does not include NSTCG
Computation of Gain Loss
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
Wash Sales
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
Section 1244 Stock
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.
Bad Debt
Business Bad Debt is deductible as ordinary loss
Non- business bad debt is treated as a STCL
NLTCG
LTCG - LTCL
Section 1231
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
Netting of 1231 Gains and Losses
Gains >Losses = Treated as long-term capital gain
Losses > Gains = Treated as an ordinary loss.
Installment Sales
Installment Sales
Gain = Gross Profit ratio * Payments received in CY
Like Kind Exchanges
LKE- No gain or loss recognized unless boot is received (forgiveness of debt too)
Sect 1245;
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.
Basis of inherited property
Is the FMC on the date of death
Sale of collectible items
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
If Capital Losses Exceed Capital Gains for Tax Year
the excess is taken into account as negative taxable income for up to $3,000 ($1,500 if married filing a separate return
The basis of property acquired in a like-kind exchange
Is equal to the adjusted basis of property surrendered, decreased by any boot received and increased by any gain recognized
Non-accountable employee reimbursement plan
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.
Elderly Tax Credt
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).
Like Kind Exchange Treatment
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.
Long Term / Short Term
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
Uniform Capitalization (Unique Items)
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.
1231/1245 Property
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
Capital Gain net Income
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.”
S-Corp Basis:
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.
Gift Tax
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
