R3: Gains and Losses Flashcards
What is a capital asset?
An asset held for personal use and investment
Section 1231 property
“Depreciable personal property” used in a trade or business and held for over 12 months
Excludes intangible assets
Accounts receivable
Ordinary asset
Investment assets of a taxpayer that are not inventory are
Capital assets
Examples of capital assets
- Personal automobile
- Furniture and fixtures of personal home
- Stocks and securities of all types
- Personal property
- Real property not held for trade (land)
- Interest in partnership
- Goodwill
- PURCHASED copyrights, literary, musical or artistic works
- Assets held for investment
Examples of assets that are NOT capital assets
- Inventory
- Depreciable personal property used for business
- A/R
- Created copyrights, literary, musical or artistic works
- Treasury stock
Options
Are capital assets and generate short-term capital gains or losses
Long-term capital loss limit
$3,000 to offset ordinary income, the rest can be carried forward indefinitely
Section 1245 gains
Equipment used in trade or business for more than one year
Gains on Section 1245 property
Section 1245 gains on sale of equipment are ordinary income to the extent of depreciation or section 179 deduction (depreciation recapture), and the remainder is a section 1231 gain
Installment method gain calculation
Sale price
Less: Original price
Less: Depreciation
= Gain on sale
Gross profit percentage = Gain/ Sale price = X
Gain realized in the year of sale = cash received times X
Section 1245/1250 Depreciation Recapture
Depreciation claimed on a business assets will be ordinary income when sold, and the difference is a long-term capital gain
1250 is for real property (office buildings)
If business asset held for less than 12 months
Ordinary gain
Gross profit calculation for installment method
Gross profit = amount realized less selling costs less adjusted basis of the property sold
Short sales, capital treatment
short-term capital gain/loss
Netting capital gains/losses
- ST capital losses can offset ST and LT gains
- LT gains and losses can only offset LT gains or losses
Nonbusiness bad debt, cash basis
The bad debt must be completely worthless and/or unrecoverable in order to be deductible
Installment sales between related parties
Are allowed
Foreclosure of property
Is nonrecourse debt, meaning that the owner is not personally liable
If the bank forecloses and sells the property, the gain is the amount of debt prior to foreclosure
Section 1245 Depreciation Recapture
Lesser of:
Claimed depreciation OR
Gain recognized
Loss on the sale of a personal residence
NOT deductible
Section 1244 stock
ordinary loss
Alternate valuation date, basis
if the alternate valuation date is elected, the basis of inherited property will be based on the earlier of:
- The FMV at the date the property is transferred
- The FMV six months after the date of death
Gift tax calculation for basis
Gift tax paid x (Net appreciation/Net appreciation + maximum gift tax)
