R3 - Property Taxation

Question 1

What is the gain loss rules for gifts of property?

Answer 1

GR: property acquired as a gift retains the COST basis from the donor.
However, if FMV at time of gift is lower than basis:
If FV is HIGHER than donors cost, use donors cost
If FV is LOWER than donors cost, use FMV at time of gift
If FV is LOWER than donors cost and HIGHER than FMV at time of gift, no gain or loss is recognized

Question 2

What type of loss is RECOGNIZED in like kind exchanges?

Answer 2

Realized loss is never recognized in like kind exchanges

Question 3

What is the new basis of a property in a like kind exchange?

Answer 3

Adjusted basis of property given up
PLUS gain recognized
LESS loss recognized
LESS boot received

Question 4

What type of gain is recognized for like kind exchanges?

Answer 4

Lesser of the gain realized or the amount of boot received.
Received $450K property + $50K cash.
Gave up property with basis of $300K.
REALIZED $200K gain
RECOGNIZED $50K = amount of boot
*NET boot - So if you give up mortgage of $120K and assume mortgage of $70K, that is $50K boot to you.

Question 5

What are the carry forward rules for an individual capital loss?

Answer 5

$3K allowable net loss each year
No carry back
indefinite carry forward

Question 6

How are Section 1231 Losses treated ?

Answer 6

Ordinary loss – fully deductible against ordinary income

However, it can be recaptured for 5 years to offset 1231 gains

Question 7

What is section 1231 assets?

Answer 7

Depreciable personal and real property used in a business and held over 12 months
Section 1245 - Personal Property
Section 1250 - Real Property

Question 8

What is treated as ordinary income for 1231 gains?

Answer 8

Gain to the extent of lesser of accumulated depreciation or gain realized. and net 1231 gain to the extent of unrecaptured 1231 losses in previous 5 year.

Question 9

What is treated as capital gains for 1231 gains?

Answer 9

Net section 1231 gain after depreciation recapture and 5 year look back.
(Think of example with rental real estate, depreciation recapture is taxed first, and then remainder is capital gains)

Question 10

What is deductible for nonbusiness bad debt?

Answer 10

If the debt is totally worthless, then it is treated as a short term capital loss in the year it becomes totally worthless. Normal capital loss limitations apply.

Question 11

What is the definition of related parties for tax purposes?

Answer 11

Brothers and sisters, spouses, lineal descendants ( father, son, grandfather). Entities that are more than 50% owned, or constructively owned.
NOT Step-relationships, cousins, nieces, or in-laws

Question 12

What are the gain/loss rules for related party property sales.

Answer 12

No gain or loss recognized when selling to related party. Holding period starts with new owner’s period of ownership.
Same as gift rules for recognizing gain loss to outside party.
When selling for higher, use “relatives basis”
When selling between, no gain or loss
When selling lower, use “Purchase Price” to determine loss.

Question 13

What is the amortization period for intangible assets ?

Answer 13

180 months

Question 14

What is the half year and mid quarter convention?

Answer 14

General rule: Half a year applies to personal property. Claim half a year of depreciation in year placed in service and disposed of.
Mid-quarter - applies if more than 40% of personal property placed in service in last quarter.

Question 15

What is MACRS depreciation for real property?

Answer 15

Residential - 27.5 straight line
Nonresidential - 39 year straight line
Mid month convention - half a month when placed in service, plus remainder of year. So placed in service August 7 = 4.5 months of depreciation.

Question 16

What is section 179 depreciation?

Answer 16

Allowance of $1M of property can be expensed immediately. Must be acquired from an unrelated party. Cannot create a tax loss. Reduced dollar for dollar by the amount over $2,590,000.

Question 17

What are the rules on a wash sale?

Answer 17

No losses allowed on a wash sale, but gains are recognized.

If a stock is sold at a loss and repurchased within 30 days before or after the sale.

Question 18

What is the basis of new property in an involuntary conversion?

Answer 18

Basis of the new property is equal to the cost of the new property reduced by the gain on the old property that was not recognized. Gain is recognized = loot you keep. When insurance proceeds are more than you invest in replacement property.

Question 19

Example of gain / basis for involuntary conversion

Answer 19

Old building insurance check= $450K
Adjusted basis = $400K
Realized gain = $50K
Bought new building = $440K
Recognized gain = $10K - loot you keep
Basis of new building = $400K - cost of new less gain not recognized

Question 20

When does the new property have to be purchased to qualify for nonrecognition of gain for involuntary conversion?

Answer 20

within two years after the close of the first taxable year in which any part of the gain upon conversion is realized. Section 1033(g)(4) extends this period another year in the case of a condemnation of real property held for productive use in a trade or business or for investment