R3 Flashcards
Basis of Property and Holding Period
cost + all amounts to prepare the property for use (shipping cost, sales taxes and testing costs). Types of property include:
a.Real Property (land and buildings attached)
b.Personal Property ( all other )
Holding period begins after acquisition
Adjusted Basis referred also as tax basis
Basis - Accumulated Depreciation
Basis Spreading
Receives nontaxable stock dividend requires to spread basis of original shares over original and new shares. Results in the same total basis but lower basis per share.
Gifted Property Basis (GAIN/LOSS)
Holding Period: assumes donor’s holding period unless Lower FMV< Sales Price (loss) starts as of the date of the gift
Nontaxable event, basis = NBV, retains the cost basis of original donor. Basis increases by gift tax paid on net appreciation of the value. Gain/Losses calculated using Rollover Cost Basis.
Exception:
If FMV is less than Donor’s rollover basis, basis for the donee depends on future selling price.
Sale Price < Lower FMV = Loss (basis=lower FMV)
Sale Prices < Rollover cost basis; > Lower FMV = No Loss/Gain recognized & = selling price (middle value)
Gifted Property Basis for Depreciation
Lesser of:
a. Donor’s adjusted basis at the date of gift
b. The FMV at the date of gift
Accumulated depreciation will reduce basis before calculating gain/loss on sale.
Inherited Property Basis & Holding Period (taxable event)
GR: Takes as its basis the step-up or step-down to the FMV at the date of the decedent’s death.
If Alternate Valuation Date is used, then asset is valued using FMV at the earlier of: distribution date or 6 month after death.
Holding Period is automatically considered long-term property
Property Capitalization & Expenses
Holding period: as of the date of completion
Improvements = capitalize
All property except for inventory = capitalize
Amounts paid or incurred for acquiring, creating, or enhancing intangible property MUST be capitalize
Single Unit Property
Single Unit of Property: all components that are interdependent. A component is interdependent if placing in service of one component is dependent on the placing of other components.
Examples: building structure to the extent of building and its structural components.
Building Systems are considered separately from building structure, i.e. plumbing, AC system, fire protection, alarm, elevators, etc…
Property De Minimis Rule
Financial Reporting Vs. Tax Reporting when to recognize capitalize expenditures
annual de minimis annual expense regarding expenditures to acquire or produce property is capitalization policies is in effect as of the beginning of the year states the following:
Property purchases under a certain $ amount
Property with an economic useful life of 12 month or less (expense)
Qualifications of Property Expense Routine Maintenance
Small Taxpayer
Small Taxpayers: is a taxpayer with average annual gross receipts of $10 million, or less during the preceding 3 tax years.
b. adjusted property basis is < $1 million
A small taxpayer is allowed to expense routine maintenance that are expected to occur more than once during the class life of the assets if:
The lesser of :
expenditures do not exceed 2% of unadjusted basis of building or $10,000
Calculating Property Gain/Loss at Disposition
Assets not in the ordinary course of business
Amount Realized
Less: Adjusted Basis of Asset Sold
Equal = Gain/ Loss
*All realized gains and losses are recognized (reported in tax return) unless “HIDE” or “WRaP” applies
Property Amount Realized (Gain/Loss Calculation)
Money received (boot)
Cancellation of Debt (COD) (boot)
FMV of property
Less Selling expenses
Adjusted Basis of Asset Sold
Purchase = Cost Gift = Rollover Cost Inherited = Step-up FMV
Gain on Property Disposition (not in the ordinary course of business)
HIDE IT (nemonic) Homeowner's exclusion Involuntary conversion Divorce property settlement Exchange if like-kind (business assets) Installment sale Treasury capital and stock
- A gain is not taxable if taxpayer HIDE IT, recognition is deferred. Substituting tp’s basis given up for basis of property acquired
** Gain to the extent of boot (cash or COD) is taxable
Loss on Property Disposition (not in the ordinary course of business)
Wash sale losses
Related party losses
And
Personal losses
Deferred Gain Recognition
Homeowner’s Exclusion (HIDE IT)
To qualify for Full Gain Exclusion:
a. Must have owned and used the property as a principal residence for 2 years or more during a 5 year period ending on the sale or exchange asset.
b. Period do not have to be continuous, a gain may be reduced because a nonqualified use (rental of property)
c. Either spouse of MFJ return must meet ownership status and both must meet the use requirement
If both spouses don’t qualify for the full exclusion one spouse is still eligible for $250,000 exclusion for MFJ
Amount of Exclusion:
$500,000 MFJ, Widower
$250,000 MFS, Single, HH
Gain Exclusion for Nonqualified use of property
The portion of the gain attributed to the nonqualified use is not eligible for exclusion.
Hardship Provision (Partial Exclusion)
Sale due to change in place of employment, health and unforeseen circumstances, and the exclusion has been claimed in the last 2 years.
New place must be at least 50 miles farther from the residence sold to the previous place of employment
Involuntary Conversion (GAIN EXCLUSION) (Nontaxable Event) Destruction, Theft, Condemnation of Property
Proceeds > Cost of Replacement = Gain
Realized Gain-Excess of Cost of Replacement = Boot (RECOGNIZED)
Basis of Replacement = Cost - Gain not recognized
Loss is recognized immediately, Basis = replacement cost
a. Gain excluded if full amount of received proceeds are reinvested. If partially reinvested, then gain is recognized to the extent of the amount not reinvested.
b. No Gain recognized when basis of reinvested property = basis of old asset
c. Personal Property Reinvestment must occur within 2 years after close of taxable year of the gain was realized.
Principal residences for federally declared disaster area is 4 years.
d. Business property reinvestment 3 years from taxable year end.
Divorce Settlement (HIDE IT) Property (Gain Exclusion) Nontaxable event
Recipient property basis = carryover basis of transferor’s
Nonrecognition of gain applies even if property is subject to liabilities greater than adjusted basis
Exchange of Like-Kind Business/Assets;
Timing Requirements (GAIN Exclusion) (applies for trade or business)
Like-Kind Property FMV of Def. Def.
Basis(boot received) = Like-Kind Prop. - Gain + Losses
Losses NOT RECOGNIZED
Real property exchanged for real property
Personal property exchanged for personal property with same personal use.
Identify replacement prop. within 45 days of giving up, like-kind property must be received earlier of 180 days or due date of taxpayer’s income tax return.
Gain only recognized to the extent of boot when received, otherwise is realized gain.
Installment Sales
Deferred Gain, revenue reported when cash pmts received.
Taxable income = annual cash collections x gross profit %
Treasury and Capital Stock ( GAIN EXCLUSION)
Gains are exempt for and losses are disallowed for:
- sales of stock by corporation
- repurchase of stock by corporation
- reissue of stock
