Property Transactions1

Question 1

The basis calculation rules

Answer 1

amount realized
-Adjusted basis of asset sold =Gain/Loss

Question 2

Amount realized

Answer 2

1. Cash received (boot); 2. Cancellation of debt (boot); 3.Property received at FMV; 4.services received at FMV; 5.<selling expense(commisstion)

Question 3

adjustment basis of asset sold

Answer 3

1. Purchase=Cost 2. Gift= Rollover cost 3. Inherited= Step-up FMV

Question 4

Gain not recognize including;

Answer 4

[HIDE IT] Homeowners exclusion;Involuntary conversion; Divorce property settlement; Exchange of like kind asset; Installment sales; treasury capital&stock

Question 5

Loss not recognize including;

Answer 5

[WRaP] Wash sales; Related party; Personal losses

Question 6

what is not capital asset?

Answer 6

1. Property normally include in inventory or held for sale to customers in the ordinary course of business. 2.Depreciable personal property and real estate used in a trade or business (section 1231,1245,1250) 3. AR,NR 4. Original artist of Copyright, literary, musical, or artistic compositions 5. Treasury stock(not an ordinary asset and not subject to capital gains treatment)

Question 7

What is the basic calculation for basis in property?

Answer 7

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 8

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

Answer 8

[Generally, rollover cost basis ]; Basis: 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 9

What is the basis and holding period of inherited property?

Answer 9

Step up(down) to FMV;                                                                                                                     Basis: [General rule: FMV at date of death]. or alternate valuation date (6 months )
Holding period: Property inherited is Long-term property regardless of how long it is held by the recipient.

Question 10

What is the holding period on a stock dividend? [?]

Answer 10

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

Question 11

What property is eligible for like-kind exchange treatment?

Answer 11

Used in the trade or business or held for investment, except Partnership interest, Real property in different countries, Inventory, Stock, Securities [PRISS].

Question 12

What is BOOT in a like-kind exchange?

Answer 12

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

Question 13

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

Answer 13

DO NOT subtract the boot paid amount from the cash received

Ignore the boot paid amount from the mortgage completely

Question 14

What is the basis rules of the like-kind exchange business/investment assets?

Answer 14

=Adjustment basis of the asset given up+Gain recognize+Boot paid-Boot received

Question 15

the steps of calculating basis of the like-kind exchange new property?

Answer 15

1. the gain/loss realized 2. the gain/loss recognized 3. the basis of the new property

Question 16

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

Answer 16

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]. Losses would be recognized,when loss recognized, the basis of the new property is its replacement cost.

Question 17

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

Answer 17

1, Ownership, 2, Must live there 2 out of 5 years
For a single taxpayer, $250,000 is deductible from his gain, $500,000 for jointly. Widow claim $500,000, but should sale within 2 years after the spouse died. Loss on sale of home is NOT deductible

Question 18

What is a wash sale?

Answer 18

[30 /30] A wash sale exists when a security (stock/bond) is sold for a loss and is repurchased within 30 days before or after the sale date.
Disallowed loss adds to basis of new stock

Question 19

What is the basis of the repurchase security in a wash sale deal?

Answer 19

=Purchase price of new security + Disallowed loss on the wash sale

Question 20

What is the date of acquisition of the repurchased security?

Answer 20

the date of acquisition of the original security.

Question 21

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

Answer 21

Ancestors; siblings; spouse; descendants; corporation or partnership where you’re a 50% shareholder;In-laws are NOT related parties.
Seller cannot take a loss on sale to a related party; but gain is always recognized(exception).
Related party gets to use the disallowed loss when they sell.
Related party’s holding period begins with the new owner’s period of ownership.

Question 22

What are the basis rules of related party transaction?

Answer 22

The (second relatives )depends on whether the second relatives resale price is higher,lower, or between the first relative’s basis and the lower selling price to the second relative.

Question 23

What is the steps of calculating installment sales?

Answer 23

Recignize when cash is received. 1.Gross profit= sale-COGS 2.Gross profit margin=Gross profit/Sales price 3. Earned Revenue = Cash collections *Gross profit margin

Question 24

How are capital losses taken in a corporation?

Answer 24

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 25

What assets are NOT capital assets?

Answer 25

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

Goodwill IS a capital asset

Question 26

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

Answer 26

Net all STCG and STCL
Net all LTCG and LTCL
Add together
STCL,28%,25%,15% ,then LTCL LTCL is the same

Question 27

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

Answer 27

$3;000 per year. Unused is carried forward and taken $3;000 each year.
No carryback is allowed.

Question 28

Which property is governed by section 1231?

Answer 28

Real or Personal Business Property held more than a year

Inventory is never 1231 Property

Question 29

How are section 1231 gains and losses handled?

Answer 29

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 30

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

Answer 30

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 31

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

Answer 31

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 32

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

Answer 32

When the asset is held less than one year.