Property Transactions (includes Becker)

Question 1

What is the basic calculation for basis in property?

Answer 1

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 2

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

Answer 2

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 3

What is the basis and holding period of inherited property?

Answer 3

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 4

What is the holding period on a stock dividend?

Answer 4

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

Question 5

What property is eligible for like-kind exchange treatment?

Answer 5

Real for real or personal for personal business property only

US property only

Question 6

What is BOOT in a like-kind exchange?

Answer 6

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

Question 7

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

Answer 7

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

Question 8

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

Answer 8

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 9

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

Answer 9

Must live there 2 out of 5 years

Loss on sale of home is NOT deductible

Question 10

What is a wash sale?

Answer 10

30 Day rule applies

Disallowed loss adds to basis of new stock

New stock takes on date of acquisition of old stock

Question 11

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

Answer 11

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 12

How are capital losses taken in a corporation?

Answer 12

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 13

What assets are NOT capital assets?

Answer 13

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

Goodwill IS a capital asset

Question 14

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

Answer 14

Net all STCG and STCL

Net all LTCG and LTCL

Add together

Deduct $3;000

Question 15

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

Answer 15

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

No carryback is allowed.

Question 16

Which property is governed by section 1231?

Answer 16

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

Question 17

How are section 1231 gains and losses handled?

Answer 17

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 18

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

Answer 18

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 19

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

Answer 19

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 20

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

Answer 20

When the asset is held less than one year.

Question 21

Capital assets include:

Answer 21

Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds. (Depreciable property used in a trade or business is excluded from the statutory definition of capital assets. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets. )

Question 22

Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during the year. On July 26 of the current year, Alice sold the 300 shares of Zinco for $25,000.

What amount of the loss from the sale of Zinco stock can Conner deduct in the current year?

Answer 22

$0. Even though Conner has a realized loss of $10,000 on this transaction he cannot deduct the loss since it was incurred in a transaction with his daughter, a related party.

Question 23

Conner purchased 300 shares of Zinco stock for $30,000, 20 years ago. On May 23 of the current year, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during the year. On July 26 of the current year, Alice sold the 300 shares of Zinco for $25,000.

What was Alice’s recognized gain or loss on her sale?

Answer 23

$0. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market.

Question 24

Hall, a divorced person and custodian of her 12-year old child, filed her Year 9 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her Year 9 return:

In June, Year 9, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall’s reportable gain or loss in Year 9 on the sale of the 100 shares of stock gifted to her?

Answer 24

Rule: The basis of property received as a gift in the hands of the donee depends on whether the selling price of the property is more or less than the basis for gain or loss.

If the property is sold at a gain, the basis to the donee is the same as it would be in the hands of the donor. If the property is sold at a loss, the basis to the donee is the same as it would be in the hands of the donor or the FV of the property at the date of the gift, whichever is lower. In some cases, such as this fact situation, there is neither gain nor loss on the sale of the gift, because the selling price is less than the basis for gain and more than the basis for loss.

Question 25

An individual had the following capital gains and losses for the year:

Short-term capital loss $ 70,000

Long-term gain (unrecaptured Section 1250 at 25%) 56,000

Collectibles gain (28% rate) 10,000

Long-term gain (15% rate) 20,000

What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?

Answer 25

Specific netting procedures for capital gains and losses are outlined in the Internal Revenue Code for non-corporate taxpayers. Gains and losses are netted within each tax rate group (e.g., the 15% rate group). The facts of this question have already performed this step for us.

Short-term Capital Gains and Losses

If there are any short-term capital losses (this includes any short-term capital loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates.

Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% rate group (e.g., collectibles).

Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g., un-recaptured Section 1250 gains).

Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g., 15%) tax rate.

Long-term Capital Gains and Losses

If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group.

If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.

In this case, we are given net short-term capital losses of $70,000 to start with. Following the rules above, this first goes to offset any short-term gains at the ordinary income rates, but there are none in the facts. So, the next step is to offset the losses against any 28% rate gain long-term capital gains. The facts provide that there is $10,000 in gains from collectibles (taxable at the 28% rate). The remaining short-term loss ($60,000) is next used to offset the long-term capital gains at the 25% rate. The facts give us un-recaptured Section 1250 gains of $56,000 (taxed at the 25% tax rate). The remaining short-term capital loss is $4,000 ($70,000 - $10,000 - $56,000 = $4,000). The balance of the short-term capital losses is finally used to offset any capital gains taxed at the 15% tax rate, which the facts give us as $20,000. Therefore, after the $4,000 remaining short-term capital loss is applied to offset the $20,000 long-term capital gain taxed at the 15% tax rate, there is an amount of $16,000 remaining of long-term capital gains to be taxed at the 15% tax rate.

Question 26

A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?

Answer 26

Rule: Nonrecognition treatment is accorded to a “like-kind” exchange of property used in the trade or business or held for investment (with the exception of inventory, stock, securities, partnership interests, and real property in different countries). “Like-kind” means the same type of investment (e.g., realty for realty or personalty for personalty, assuming the personal property falls within the same “asset class” for tax depreciation purposes).

Choice “b” is correct. The exchange of a corporate office building for a vacant lot qualifies for like-kind nonrecognition treatment. It is the exchange of realty for realty of property used in the trade or business or held for investment.

Question 27

A taxpayer trades in an automobile used solely for business purposes for another automobile to be used in his business. The automobile originally cost $35,000 and he has taken $18,000 in depreciation. The old automobile is currently worth $20,000 and the new automobile the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss realized by the taxpayer on this transaction?

Answer 27

Calculations for “Realized Gain with No Boot”

Gain/Loss Realized:
Amount realized =
Fair market value of auto received - Adjusted basis of auto given up=
$20,000 fair market value of new auto - ($35,000 cost - $18,000 depreciation)=
$20,000 fair market value of new auto - $17,000 adjusted basis of old auto=
$3,000 gain

Gain/Loss Recognized:
Gain recognized=
$0 (the lesser of gain realized of $3,000 or boot received of $0)
Basis of New Property:
New basis=
Adjusted basis of property given up + Gain recognized
=$17,000 + $0=$17,000