Property Transactions Flashcards
What is the basic calculation for basis in property?
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.
What is the basis and holding period of inherited property?
FMV at date of death or alternate valuation date (6 months later)
If alternate date is elected but 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.
What is the recipient or donee’s basis on gifted property?
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
What property is eligible for like-kind exchange treatment?
Real for real or personal for personal business property only
US property only
Property held for business use may be exchanged for investment property or vice versa
What is BOOT in a like-kind exchange?
Cash received
+ unlike property received
+ liability passed to other party
Note: Liability passed to other party is debt relief.
What is the holding period on a stock dividend?
Holding period of new stock received from a dividend takes on the holding period of the original stock
What is an involuntary conversion? When does it NOT result in a gain?
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.
In a like-kind exchange; how is it handled if a netting of mortgages results in net boot paid?
DO NOT subtract the boot paid amount from the cash received
Ignore the boot paid amount from the mortgage completely
What is a wash sale?
30 Day rule applies - before or after date of sale
Disallowed loss adds to basis of new stock - it is NOT deductible
New stock takes on date of acquisition of old stock
Does NOT apply to gains
What assets are NOT capital assets?
The following are NOT capital assets, except where indicated:
Inventory; Business interest; Accounts Receivable/Notes Receivable; Covenant not to compete (the purchaser of this covenant will recognize it as a Section 197 intangible)
Goods held primarily for sale to customers in the normal course of business
Depreciable or real property used in a trade or business
Copyrights or artistic, literary, compositions created by taxpayer (However: These ARE capital assets only if purchased by the taxpayer)
Patents ARE generally capital assets in the hands of the inventor
Goodwill (internally generated) IS a capital asset
What are the requirements for exclusion of gain on a primary residence? How are losses treated?
Must live there 2 out of 5 years
Loss on sale of home is NOT deductible
Who is considered a related party in a property transaction? How does it affect the transaction?
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 to an unrelated party. The disallowed loss gets off-set again the gain
However, if the related party sell the property (i.e. stock) to an unrelated property and a LOSS results; they CANNOT off-set the disallowed loss against the loss incurred from selling to an unrelated party
Related party’s holding period begins when they acquire the property.
In-laws are NOT related parties.
What are the steps in applying a capital gain or loss?
[For individual taxpayers, NOT corporations]
Net all STCG and STCL
Net all LTCG and LTCL
Add together
Deduct $3,000
How much ordinary income can be offset by an INDIVIDUAL’s capital losses?
$3,000 per year. Unused is carried forward and taken $3,000 each year.
No carryback is allowed.
Which property is governed by section 1231?
Real or Personal Business Property held more than a year
Inventory is NEVER 1231 Property
How are capital losses taken in a corporation?
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
How is section 1245 depreciation recapture handled; and when does it apply?
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
How are section 1231 gains and losses handled?
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
What property qualifies for section 1250 treatment; and how are gains/losses handled?
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
When are 1231, 1245 and 1250 gains or losses always ordinary?
When the asset is held less than one year.
What items DO NOT apply to like-kind exchanges?
The following items does NOT apply to like-kind exchanges:
- Property held for personal use
- Inventory
- Stocks
- Bonds
- Notes
- Intangible evidences of ownerships
- Interests in a partnership
- Exchange of personal property for real property DOES not apply
How do you calculate the basis of new property received in a Like-kind exchange?
To calculate the basis of the new property received in a Like-kind exchange, you do the following:
OLD Basis
+ Gain Recognized (gain recognized “steps up” your basis because you paid taxes on the gain, which increases your basis)
+ Boot Paid (Boot paid is a “P”, which is a plus to the basis)
(Boot received starts with an “R” so it is a reduction to basis)
= New Basis
How do you calculate the basis of new property received in an Involuntary conversion?
To calculate the basis of the new property received in an Involuntary conversion, you do the following:
Cost of the new property received
Less: [Gain NOT Recognized of the realized gain - this is the deferred gain]
= New Basis
What ARE capital assets?
The following are capital assets:
- Investment property - including investment in securities
- Property held for personal use (ONLY)
- Goodwill (internally generated)
How are losses on worthless stock and securities treated?
Losses on worthless stock and securities are treated as a:
Capital loss - if sold on the last day of the taxable year they become worthless
Ordinary loss - if stock and securities are those of an 80% or more owned corporate subsidiary that derived more than 90% of its gross receipts from active-type sources
How do you calculate the basis of new shares purchased in a Wash sale transaction?
To calculate the basis of new shares purchased in a Wash sale transaction, you do the following:
Amount paid for new shares (FMV)
+ Disallowed Loss - if the loss is not allowed, it will “step up” your basis; so when you sell the shares you’ll recognize the loss if you sell the shares for less than basis, you’ll recognize the loss then
= New Basis
What does “boot received” do to Basis?
Boot received DECREASES basis
How is the gain and/or loss treated from property that is exchanged solely for other like-kind property?
If property is exchanged solely for other LIKE-KIND property, NO gain or loss is recognized
The term like-kind means the same class of property (i.e. real estate must be exchanged for real estate, personal property must be exchanged for personal property within the same general asset or product class)
The basis of the property received is the same as the basis of the property transferred
What does “boot paid” do to Basis?
Boot paid INCREASES basis
In a like-kind exchange transaction, if a person receives UN-LIKE kind property; how would this be treated?
If a person receives UN-LIKE property in a like-kind exchange transaction, the un-like property received would be considered boot received.
For example, if a person is exchanging investment real estate for land to be held for investment - this is like-kind property.
However, if one person gives cash and a sailboat in addition to the land; then the cash and sailboat is considered to be un-like property.
Un-like property is considered boot and is received at its FMV
In regards to Non-taxable and Like-Kind Exchanges, what is the recognized gain rule?
Note: This only applies if boot is received
To determine how much of a gain is taxable, the Recognized gain is the LESSOR of the realized gain and boot received
In an Involuntary conversion, how do you treat the gain that is NOT recognized of the realized gain?
In an involuntary conversion, the recognized gain rule is that you take the lessor of the Realized gain and the Amount not invested
The difference between the realized gain and the amount not invested is the deferred gain. The deferred gain DECREASES basis because it is the amount of the realized gain that is not recognized
In general, Gains ALWAYS increase basis, but they have to be Recognized. Unrecognized or deferred gains DECREASE basis
In a related party transaction, if a father sells stock to his daughter at a loss; he can’t recognize the loss (disallowed loss). The daughter can use the disallowed loss to off-set her gain when she sells the stock to an unrelated party.
What happens if the daughter uses the disallowed loss to offset a smaller gain when she sells to an unrelated party?
In this situation, the daughter can use the disallowed loss to off-set her gain. However, she can only use amount of disallowed loss, up to the Gain
If there is any “extra” disallowed loss that wasn’t used, it is lost
This means that the daughter CANNOT use the remaining disallowed loss to offset against future gains from the sale of stock to an unrelated party
No carrybacks or carry forwards! - it’s gone
In regards to capital gains and losses:
Can you net STCG’s with LTCG’s?
Can you net STCL’s with LTCL’s?
Nope!
You can only net the following:
LTCG’s with LTCL’s
&
STCG’s with STCL’s
Note: You do the netting of capital losses and gains above to determine:
Net STCG or Net STCL
&
Net LTCG and Net LTCL
Then, the above 2 net together to determine net capital gain or los:
NCG or NCL
What is the rule regarding:
- Excess of 1231 Gains over 1231 Losses
- Excess of 1231 Losses over 1231 Gains
If you have excess of 1231 Gains > 1231 Losses = LTCG
If you have excess of 1231 Losses > 1231 Gains = Ordinary Loss
What is a section 1245 gain?
A section 1245 gain is the depreciation that you take on personal property used in a trade or business for more than 1 year, assuming you sold it for a gain
So, whatever depreciation you took on the asset that is “recaptured”, it is ALWAYS an ordinary income gain
Now, if you sold the property at a loss, then there wouldn’t be any recapture and this would be a section 1231 Ordinary loss
Note: A section 1245 gain is basically the depreciation taken on a section 1231 asset. So what ever the depreciation taken, it is section 1245 ordinary income. If the selling price is greater than the cost or basis; then that gain (called the “excess gain”) is considered section 1231 LTCG
What is a section 1245 gain?
A section 1245 gain is the depreciation that you take on personal property used in a trade or business for more than 1 year, assuming you sold it for a gain
So, whatever depreciation you took on the asset that is “recaptured”, it is ALWAYS an ordinary income gain
Now, if you sold the property at a loss, then there wouldn’t be any recapture and this would be a section 1231 Ordinary loss
Note: A section 1245 gain is basically the depreciation taken on a section 1231 asset
What is a section 1231 gain?
Section 1231 assets are personal and real property used in a trade or business that is held for more than 1 year.
Likewise, a 1231 gain would be the sale of this kind of asset if it was held for more than a year
However, if this type of asset is held for Less than a year; then the gain or loss would be Ordinary
What is the amount of recapture when an individual taxpayer holds real property for 12 months or more and then sells it?
If an individual taxpayer holds real property for 12 months or more and then sells it; all of the gain (assuming they sold it for a gain) is section 1231 LTCG
No recapture when you have real estate used in a trade or business held for more than 1 year and that’s held by an individual taxpayer
What is the amount of recapture when a Corporation holds real property for 12 months or more and then sells it?
If a Corporation holds real property for 12 months or more and then sells it; the recaptured amount would be 20% of the depreciation taken (whatever the amount is) and this is called ordinary income under section 291
The remaining amount, called the excess gain, is a section 1231 LTCG
What is a section 1250 asset?
Section 1250 assets deal with real estate held for 12 months or more that was purchased before 1987 (when ACRS was used)
The difference between depreciation taken under ACRS (old method) and MACRS SL (new method) is called excess of ACRS depreciation over MACRS (assuming that ACRS method had more depreciation)
This difference in depreciation between both methods is treated as a section 1250 recapture; which is ordinary income if the asset is sold for a gain
The remaining amount of the gain is called a section 1231 LTCG
What is a section 1245 asset?
Section 1245 property generally include depreciation tangible and intangible property such as:
- Desks, machines, equipment, cars and trucks, office furniture
- Special-purpose structures, storage facilities, and other property
Note: Not buildings and structural components like: oil & gas storage tanks, grain storage bins & silos, and escalators and elevators
A loss resulting from a nonbusiness deposit in an insolvent financial institution can deducted in what ways?
Loss resulting from a nonbusiness deposit in an insolvent financial institution is generally treated as a nonbusiness bad debt deductible as a STCL
However, subject to limitations, an individual can elect to treat the loss as a casualty or miscellaneous itemized deduction
However, they can NOT deduct it as a LTCL
How do you calculate the cost of an equipment to determine adjusted basis?
The cost of equipment is:
Basis
+ depreciation (if it was deducted_
= Cost
Cost
- depreciation
= Adjusted basis
Selling price
- Adjusted basis
= Gain
How much gain can a taxpayer exclude on the sale of qualified small business stock?
A non-corporate tax payer can generally exclude 50% of the capital gain resulting from the sale of qualified small business stock held for more than 5 years
The amount of the excludible gain is subject to a cumulative limit of the greater of $10MM or 10x the investor stock basis
In a related party transaction, if a father sells stock to his son at a loss; he (father and son) can’t recognize the loss (disallowed loss).
What happens if the son later sells the stock to an unrelated party at a loss?
Does the son recognize the loss when his father sold the stock to him in addition to the loss the son incurs selling the stock to an unrelated party?
Does the father’s holding period of the stock get “tacked on” to the son holding period when he sells it to an unrelated party?
Losses are disallowed on sales between related taxpayers, including family members
If the son later sells the stock to an unrelated party at a loss, the son will only recognize that loss. The loss that the father had (the disallowed loss) does not get recognized by the son when he sells his stock to an unrelated party (at a loss)
The son’s stock basis is determined by his cost (not by the father’s cost) and there is no “tack-on” of the father’s holding period. So, if the son only held the stock for 4 months and then sold it to an unrelated party, the loss would be a short-term capital loss even if the father held the stock for more than a year
How would you summarize Section 1250 property?
Section 1250 property applies to real property held more than one year and sold at a gain but only if straight line depreciation is NOT used
• Un-recaptured Section 1250 Gain = lessor of:
1. Gain on the sale of the property or
- Total depreciation taken on the property
- Unrecaptured Section 1250 Gain is taxed at 25%
- If straight line depreciation is used, NO Section 1250 gain, entire gain is 1231 capital gain
Note: Section 1250 property applies to all real property (i.e. buildings and structural components) that is NOT section 1245 recovery property
In regards to gifts acquired from a decedent (property a tax payer inherits when someone dies), if the alternative valuation date is elected and the property is disposed of BEFORE that date, what basis of the property should be used and at what date?
The rule is to use FMV on date of disposition if alternate valuation is elected and property is distributed, sold, or otherwise disposed of during 6 months following death
So in this situation, the basis for the property would be its FMV at date of disposition (distribution) - b/c the property was distributed BEFORE the alternative valuation date, which is 6 months after death
Note: However, if the alternative valuation date was elected, but the property was actually distributed MORE than 6 months after death (i.e. 8 months), then the distributed basis to donee would be FMV 6 months AFTER date of death
How would you summarize Section 291?
Section 291 only applies to corporations
• A corporation’s ordinary income on the sale of IRC
Section 1250 property will be 20% of the lessor of:
- Depreciation taken or
- Recognized gain
• Remainder will be 1231 capital gain
What is the rule regarding the netting of assumed mortgages in like-kind exchanges (non-taxable)?
When another party assumes someone else’s mortgage, it is considered “boot received” to that party
When you assume someone else’s mortgage, it is considered “boot paid” to you
To determine what the recognized gain is, you have to take the lessor or the Realized gain and total Boot received
In determining boot received, you net the assumed mortgages and ADD cash (if cash was received as a form of boot). The rule:
- If you net the assumed mortgages and it = Net Boot Received (will be a positive #); then you add the cash (boot received) to get total boot received
- If you net the assumed mortgages and it = Net Boot Paid (will be a negative #); then you DO NOT offset it against cash (boot received). In other words, DO NOT add the cash amount to the net boot paid
Note: Net Boot Paid (assuming no cash boot received) does NOT affect the recognition of the gain
How do you calculate the Realized gain in like-kind exchange problems?
In like-kind exchange problems you sum up everything you received (i.e. land, un-like property, boot received or the assumption of your mortgage by the other party) and you subtract everything that you gave up (i.e. your old basis, boot paid or your assumption of the other party’s mortgage) to arrive at the realized gain
Then…you compare boot received to the realized gain amount and the lessor one = Recognized gain
What is the Recognized gain rule with respect to involuntary conversions?
With involuntary conversions, the Recognized gain is the lessor of the Realized gain and the Amount not invested
What is the Recognized gain rule with respect to involuntary conversions?
With involuntary conversions, the Recognized gain is the lessor of the Realized gain and the Amount not invested
How are losses from the sale or exchange of property between corporations that are members of the same CONTROLLED GROUP reported?
Any loss from the sale or exchange of property between corporations that are members of the same controlled group is DEFERRED (instead of disallowed) until the property is sold outside the group
Controlled group is entity with at least 80% or more ownership
