Property Transactions

Question 2

What is the basic calculation for basis in property?

Answer 2

Cost of property
\+ Purchase expenses
\+ Debt assumed
\+ Back taxes and interest paid
= Basis

Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.

Question 3

What is the recipient or donee’s basis on gifted property?

Answer 3

Sold at a gain: use donor’s basis

Sold at a loss: use lesser of donor’s basis or FMV at time of distribution

Sold in between donor’s basis and FMV: No gain or loss

Question 4

What is the basis and holding period of inherited property?

Answer 4

FMV at date of death or alternate valuation date (6 months later)

If alternate date is elected by property is sold before 6 month window; use FMV at date of death.

Property inherited is LTCG property regardless of how long it is held by the recipient.

Question 5

What is the holding period on a stock dividend?

Answer 5

Holding period of new stock received from a dividend takes on the holding period of the original stock

Question 6

What property is eligible for like-kind exchange treatment?

Answer 6

Real for real or personal for personal business property only

US property only

Question 7

What is BOOT in a like-kind exchange?

Answer 7

Cash received + unlike property received + liability passed to other party

Question 8

In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?

Answer 8

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

Question 9

What is an involuntary conversion? When does it not result in a gain?

Answer 9

Occurs when you receive money for a property involuntarily converted

There is no gain if you reinvest the proceeds completely

If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.

Question 10

What are the requirements for exclusion of gain on a primary residence? How are losses treated?

Answer 10

Must live there 2 out of 5 years

Loss on sale of home is NOT deductible

Question 11

What is a wash sale?

Answer 11

30 Day rule applies

Disallowed loss adds to basis of new stock

New stock takes on date of acquisition of old stock

Question 12

Who is considered a related party in a property transaction? How does it affect the transaction?

Answer 12

Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder

Seller cannot take a loss on sale to a related party; but gain is always recognized.

Related party gets to use the disallowed loss when they sell.

Related party’s holding period begins when they acquire the property.

In-laws are NOT related parties.

Question 13

How are capital losses taken in a corporation?

Answer 13

capital losses only offset capital gains

Carryback 3 years - if you elect NOT to carryback; you lost the option in the future

Carry forward 5 years - only as STCL

Question 14

What assets are NOT capital assets?

Answer 14

Inventory; Business interest; Accounts Receivable; Covenant not to compete

Goodwill IS a capital asset

Question 15

What are the steps in applying a capital gain or loss?

Answer 15

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3;000

Question 16

How much ordinary income can be offset by an INDIVIDUAL’s capital losses?

Answer 16

$3;000 per year. Unused is carried forward and taken $3;000 each year.

No carryback is allowed.

Question 17

Which property is governed by section 1231?

Answer 17

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

Question 18

How are section 1231 gains and losses handled?

Answer 18

Casualty Losses on 1231 Property - Net the losses

• Net Loss = Ordinary Loss
• Net Gain = Combine with other 1231 Gains

1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss

1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG

1231 Gain = LTCG

1231 Loss = Ordinary Loss

Question 19

How is section 1245 depreciation recapture handled; and when does it apply?

Answer 19

To the extent of depreciation; treat as ordinary gain
Remainder is 1231 gain; which is LTCG - There are no 1245 Losses

1231 Gain = LTCG
1245 Gain = Ordinary
Casualty Gain = LTCG

1231 Loss = Ordinary
1245 Loss = N/A
Casualty Loss = Ordinary

Question 20

What property qualifies for section 1250 treatment; and how are gains/losses handled?

Answer 20

1250 property is Real Estate that is not 1231 Property
Use 1250 for Gain only. For losses; use 1231

Individuals: Post-1986 property with a gain is 1231 LTCG

If Straight Line depreciation is used; don’t use 1250 - Entire gain is 1231

Corps: Section 291 requires 20% of depreciation classified as ordinary gain
Remainder is 1231 LTCG

Question 21

When are 1231; 1245 and 1250 gains or losses always ordinary?

Answer 21

When the asset is held less than one year.

Question 22

Basic formula to determine gain or loss

Answer 22

Amt realized
(Adj basis of asset sold)
—————-
Gain or loss

Question 23

What is included in amount realized?

Answer 23

Cash rec'd (boot)
COD (excess = boot)
Properly recd at FMV
Services recd at FMV
(Selling exp)

Question 24

Adjusted basis of PURCHASED asset sold

Answer 24

Amt pd
+ improvements
(Depreciation)

Question 25

Adjusted basis for GIFTED asset sold

Answer 25

GR: donors rollover cost basis

Exception = lower FMV at date of gift

Question 26

Adjusted basis of GIFTED asset sold - lower FMV at date of gift

Answer 26

Sell higher = use donors basis to determine gain
Donor basis = 20,000
Sell between = no g/l
Lower FMV at date of gift = 5,000
Sell lower = lower FMV at gift date to determine loss

Question 27

Adjusted basis for INHERITED asset sold

Answer 27

GR: date of death FMV becomes basis

*step up/down to FMV

Question 28

Realized but not recognized gain - exclusions from tax

Answer 28

HIDE IT

Homeowners exclusion
Involuntary conversion
Divorce property settlements
Exchange of like kind
Installment sale
Treas capital & stock

Question 29

Realized, but not recognized loss

Answer 29

WRaP up and throw away

Wash sale losses
Related party losses
and
Personal losses

Question 30

Like kind exchange - g/l realized

Answer 30

Amt realized
FMV asset recd
+ boot (cash recd + liab assumed by other)
(Adj BASIS (NBV) of property given up)

Question 31

Like kind exchange - g/l recognized

Answer 31

Lesser of:
Realized gain
Or
Boot recd (=cash recd + liab assumed by other)

*realized LOSS never recognized

Question 32

Like kind exchange - basis of new prop

Answer 32

Adj basis of property given up
+ gain recognized
+ boot pd
(boot recd)

Question 33

Basic steps - like kind exchange

Answer 33

1. Calculate boot recd, boot pd, and amt realized
2. Fine realized gain to determine recognized gain
3. Calculate new basis