Property_Transactions Flashcards
What is the** initial** basis in property?
** Cash paid**
**+ Purchase expenses- **closing costs, settlement fees (title fees, installation of utility services), legal fees (title and deed fees) recordings fees, survey fees
+ Debt assumed (mortgage)
+ Any amounts the seller owes that the buyer agree to pay (back taxes and interest , recording, mortgage fees)
= Basis
What is the recipient or donee’s basis and holding period on gifted property?
- Sold at a GAIN: use **donor’s basis+ any gift taxed paid attributable to the gift & **carryover holding period **
- Sold at a LOSS: use lesser of donor’s basis or FMV at time of distribution (time of gift) - **holding period when the gift was received **
- Sold in BETWEEN donor’s basis and FMV: No gain or loss
What is the basis and holding period of inherited property?
-
Basis:
- FMV at date of death OR
- Alternate valuation date (6 months later)
- Exception if alternate date is elected by property is sold/transfer before 6 month window; use FMV at date of sale/transfer.
- Property inherited is alway LT property regardless of how long it is held by the recipient.
What is the ** basis and holding period on a stock dividend**?
- Basis stock dividend = FMV at date of distribution
- non taxable - basis of orignal stock is allocated relative to the FMV at the time of distribution
- Holding period of new stock received from a dividend takes on the holding period of the original stock
What properties are eligible for like-kind exchange treatment?
- Tangible Investment/Business property
- NOT intangible property
- Real for real OR Personal for Personal
- US real property only
What is BOOT in a like-kind exchange?
- Cash received + unlike property received
- Relief of debt that exceed the debt assumed
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 in the statutory limits - start earlier of date of disposition or threat of condemnation - before the close of taxable year
- 2 years - destruction or theft
- 3 years - Governement condemnation or eminent federal disaster
- 4 years - Conversion in connection with a declared federal disaster
- If proceeds not completely reinvested; GAIN is LESSER of realized gain or amount not reinvested
- Loss Schedule A - theft or casualty loss
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
- Limit 250K single / 500K MFJ
What is a wash sale?
- Taxpayer acquires same stock or securities within 30 day before or after selling stock or securities at a loss
- Disallowed loss
- loss added to basis of new stock
- New stock takes on date of acquisition of old stock
Who is considered a related party in a property transaction? How does it affect the transaction?
- Related parties: Ancestors; siblings; spouse; descendants; partnership or corporation where direct and constructive ownership is > 50%
- 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 - if gain is recognize to the extent of disallowed loss
- Related party’s holding period begins when the related party acquire the property
- In-laws, uncle are NOT related parties
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
What assets are Ordinary and Capital assets?
-
ORDINARY assets
- Inventory;
- Business asset held ≤ year
- Self created artistic works
- Accounts Receivable - arising from sales
- Covenant not to compete - are taxed as ordinary income in the year received
- Ordinary tax rate
-
CAPITAL assets
- include property held for investment and personal use
- non business asset
- do not qualify as ordinary or 1231 assets
- Goodwill IS a capital asset
What are the steps in applying a capital gain or loss?
- Net all STCG and STCL
- Net all LTCG and LTCL
- Add together
- Deduct $3,000 loss ONLY for individual
- A net loss in any rate group is applied to reduce the net gain in the highest rate group first (e.g., a net short-term capital loss is applied to reduce any net gain from the 28% group, then the 25% group, and finally to reduce gain from the 15% group).
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
- A loss resulting from a nonbusiness deposit in an insolvent financial institution is generally treated as a nonbusiness bad debt deductible as a short-term capital loss. However, subject to certain limitations, an individual may elect to treat the loss as a casualty loss or as a miscellaneous itemized deduction
Which property is governed by section 1231 assets - Non-current business assets?
- Asset used in the trade of business and held > 1 year
- **Depreciable or amortizable property **
- Land use in business, PP&E
- Casualty, theft or condemnation of property used in business
- Inventory is NEVER 1231 Property (also : property held for sale to customers, as well as accounts and notes receivable arising in the ordinary course of a trade or business, copyrights, literary, musical, and artistic compositions held by a taxpayer whose personal efforts created such property are excluded )
How are section 1231 gains and losses handled?
- Net Loss (section 1231casualty ** →** treated as ordinary income (form 4797 indv)
- Net Gain → treated as LTCG (schedule D)
- 1231 Gain must be treated as ordinary income to the extent of the taxpayer’s nonrecaptured net Sec1231 loss for the its five preceding years
How is section 1245 depreciation recapture handled; and when does it apply?
- Includes depreciable tangible and intangigle _personal property _
- To the extent of depreciation → gain is treated as ordinary gain
- Remainder is 1231 gain; which is LTCG
- There are NO 1245 Losses
- Amount of depreciation recapture
- if realized gain < accumulated depreciation → use the amount of gain
- if realized gain ≥ accumulated depreciation → use the accumulated depreciation
What property qualifies for section 1250 treatment; and how are gains/losses handled?
- Section 1250 applies to real property that is not section 1245 recovery property
- If property held ≤ 1 year → gain is treated **as ordinary **
- If property held > 1 year → gain is treated **as ordinary to the extent of additional depreciation; the remainder is a 1213 gain - LTCG **
- Individuals: 1231 LTCG if Post-1986 property with a gain and Straight Line depreciation is used - depreciation in excess of SL will be ordinary
- Section 291 - disposition of 1250 by corporation - ordinary income is increased by 20% of additional amount that would have been ordinary income if the property was a 1245 and 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 ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross profit% = Gross Profit / Contract Price
Gross Profit= sale price - AB
Installement sale income = Gross profit% * Cash collected
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
Amount realized
Cash received
+ FMV of property received
+ Net debt releif (=liablitility transferred -liabilities assumed)
- Direct selling expense
**= Amount realized **
Adjusted Basis
Initial Basis
+ improvements
- Depreciation
- Cost recovered
+/- Adjustments
**= Adjusted Basis **
G/L treatement in Like-kind exchange
- NO Gain or Loss unless Boot received
- **Gain is = lesser of **
- BOOT
- Realized gain
Basis of new asset in Like-kind exchange
Basis of old
+ liability assumed
+ gain recognized
- liability on old
- Cash/boot received
= Basis of new asset
