Property Transactions

Question 1

What are the 3 types of assets?

Answer 1

Ordinary Income - current business assets
Section 1231 - non current business assets
Capital assets - non business assets

Question 2

What are rules for Ordinary Income Assets?

Answer 2

Held <= 1 year

Includes inventory, receivables, self created artwork

Question 3

What are rules for Section 1231 Assets?

Answer 3

If held > 1 year, net loss is ordinary, net gain is capital
If held <= 1 year - ordinary
Includes depreciable property, land, PPE used in business

Question 4

What are rules for Capital Assets?

Answer 4

Includes investments, personal, family, household, goodwill
Does NOT include Treasury Stock
Non business bad debts W/O always S/T capital loss

Question 5

What is holding period and valuation of inherited assets?

Answer 5

L/T

FMV at date of death or AVD

Question 6

What is holding period and valuation for worthless security?

Answer 6

Treated as if sold on last day of tax year in which it becomes worthless
Generally considered capital loss

Question 7

What is Section 1245 depreciation recapture?

Answer 7

Gains on tangible personal property must be reported as ordinary income to extent of prior depreciation

Question 8

What is Section 1250 depreciation recapture?

Answer 8

Gains on real property must be reported as ordinary income up to additional depreciation taken over S/L
Remainder is 1231 gain (unrecaptured 1250 gain) taxed as LTCG at 25%

Question 9

What is Section 291 depreciation recapture?

Answer 9

Applies to C Corps
Calculate difference between depreciation recaptured under 1250 and 1245
20% of difference treated as ordinary income also

Question 10

What are the UNiCAP rules?

Answer 10

Any business that produces real or tangible personal property
Acquires property for resale with average annual gross receipts for past 3 years >$10M
Must capitalize costs of inventory, including:
Pre-production - design, bidding, purchasing
Production - materials, labor, factory OH, quality control
Pre-sale - storage, handling, excise tax, repackaging, warehousing
Expense selling, advertising, marketing, R and D, interest on NP

Question 11

What is the rule for acquisition or production costs under Section 263?

Answer 11

Annual expense election of $5K per item or invoice

Must prepare audited financial statements

Question 12

What are rules for improvements?

Answer 12

BAR - capitalize
Betterment
Adaptation
Restoration

Question 13

What are rules for materials and supplies?

Answer 13

Incidental materials and supplies can be expensed immediately, such as:
Property that costs

Question 14

What are rules for gift basis?

Answer 14

If appreciated property - carryover basis and holding period

If FMV lower than basis - use dual basis

Question 15

What are wash sale rules?

Answer 15

Losses not deductible if asset has been sold at a loss in repurchased within 30 days of sale
Loss is added to basis of repurchased asset

Question 16

What are considered related party sales?

Answer 16

Husband and wife
Sister and brother
Parent to child
Grandparent to grandchild
Ancestor to descendent
Majority S/H and corporation
Majority partner and partnership

Gains taxable, losses not deductible (similar to dual basis rule with gifts)

Question 17

What are NOT considered related party sales?

Answer 17

Uncle
Aunt
Nephews
In-laws
Cousins
Former spouse

Question 18

What are like-kind exchange rules under Section 1031?

Answer 18

When property exchanged for similar property, no G/L reported
Only report gain for lesser of boot received or realized gain
Boot = cash, dissimilar assets, net debt relief

Question 19

What are rules for involuntary conversions under Section 1033?

Answer 19

Gains from involuntary conversions can be deferred if property replaced within certain time limit
2 years - destruction or theft of property
3 years - government condemnation
4 years - declared federal disaster
Measured from calendar year at 12/31 taxpayer receives proceeds
Basis in replacement property = Cost - Deferred gain

Question 20

What are rules for gain on sale of personal residence?

Answer 20

If lived in home 2 out of 5 years, can exclude gain up to $250K, $500K MFJ

Question 21

What are installment sales method rules?

Answer 21

Only report portion of gain when receive payment
Not available for stock or property held for business
All depreciation recapture reported in year of sale
Installment Sale Income =
GP/Contract price = GP % x cash collected