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REG > R3 - Proprety > Flashcards

R3 - Proprety Flashcards

1
Q

Name the three different ways to obtain property:

A
  1. ) Purchase
  2. ) Gift
  3. ) Inherited
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2
Q

What is Real Property?

A

Land & Building

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3
Q

What is Personal Property?

A

Machinery & Equipment

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4
Q

As a general rule, when you obtain a piece of property tax free, what is your basis?

A

NBV

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5
Q

As a general rule, when you obtain a piece of property and are required to pay tax, what is your basis?

A

FMV

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6
Q

As a general rule, when property is gifted to you, what is your cost basis?

A

Rollover Cost Basis = Givers basis becomes your basis.

Only exception to this rule exists when FMV on the date of gift is less than the givers basis. In that case, you determine your basis only when the property is sold (to reduce possible gain / loss - see rules)

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7
Q

What is the holding period of a piece of property that was gifted to you?

A

Rollover Holding Period

Exception exists when value of gift is less than NBV @ date of gift. If required to use FMV for basis during sale, use date of gift for holding period.

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8
Q

When you inherit a piece of property, what is your basis?

A

Basis becomes FMV @ date of inheritance (date of death) (step up/down to FMV)

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9
Q

What is the alternative valuation date?

A

Alternative valuation date is the date the estate can use for FMV of all assets. Must be the earlier of 6 months after death, or date of distribution / sale (maximum is 6 months)

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10
Q

What is the holding period of property inherited by you?

A

Always assume long term when inherited anything, regardless of how long is has actually been held

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11
Q

Should property improvements be expensed or capitalized for tax purposes?

A

Capitalized

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12
Q

Should regular repairs and maintenance be expensed or capitalized?

A

Expense

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13
Q

What is the de minimis rule?

A

Companies can expense items up to $5,000 per asset if policy is written, and $2,500 is policy is not written. This rule provides guidance for assets you can expense right away under a certain dollar amount.

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14
Q

Briefly explain difference between REALIZED & RECOGNIZED:

A

REALIZED = real world, what actually happened

RECOGNIZED = recorded, subject to rules of IRS (some gains/losses may be realized, but not recognized - know rules and know how to apply)

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15
Q

Show basic calculation of determining gain/loss of a piece of property upon disposition:

A

Amount realized
(Adjusted Basis)
= Gain / Loss*

*G/L may realized, but not recognized because of HIDEIT (gains) & WRaP (losses)

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16
Q

As a general rule, if you receive boot upon sale of a piece of property, how is that boot treated?

A

As a taxable gain

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17
Q

If a gain is realized, it is not taxable if the taxpayer can “HIDE IT”, what does that stand for?

A 
H= homeowners exclusion
I= Involuntary conversions
D= Divorce property settlement
E= Exchange of Like-Kind Business property
I= Installment sales
T= Treasury & Capital Stock Transactions
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18
Q

What is the homeowners exclusion? How do you qualify?

A

H.O exclusions allows you to realize a gain of up to $250k single, $500k MFJ w/o recognizing it as a taxable gain if you pass the test:

Must own & use the residence for 2 years during any 5 year period.

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19
Q

What is the age requirement to qualify for the home owners exclusion?

A

No age requirement

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20
Q

Is the homeowners exclusion renewable? Or for one time use only?

A

Renewable

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21
Q

If a taxpayer only uses & owns a home for 1 year out of a 5 year period, can they still qualify for the homeowners exclusion?

A

You can prorate your exclusion based on what you do qualify for.

If you only qualify for 50%, just prorate the exclusion amount by 50% to exclude that portion of your gain.

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22
Q

What is an involuntary conversion and how do you qualify to get the exclusion?

A

Involuntary conversion is when property is destroyed, stolen, etc, and the taxpayer is given insurance proceeds to make them whole.

You can avoid recognizing a gain on an involuntary conversion as long as all insurance proceeds are reinvested into whatever you lost. Any amount not reinvested = boot (taxable gain)

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23
Q

During an involuntary conversion, you had a basis in a diamond ring of $5k. On the date of the conversion, the FMV of the ring was $25k. What is the new basis in the replaced ring?

A

As long as all insurance proceeds were reinvested into a new ring for $25k, basis will still be $5k for the new ring.

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24
Q

How long does a taxpayer have to reinvest insurance proceeds for involuntary conversions in order to avoid recognizing a gain?

A

Personal property = 2 years from that YE

Business property = 3 years from that YE

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25
Q

How do you determine basis after an involuntary conversion after some of the insurance proceeds were not reinvested?

A

New basis = Cost of new - Gain not recognized

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26
Q

How is a loss treated on an involuntary conversion?

A

All loss can be recognized immediately. Basis of new property = replacement cost

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27
Q

In a divorce property settlement, what is the basis of the property received by the wife?

A

Nontaxable = NBV (rollover basis)

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28
Q

Gains on like-kind exchanges qualify for non-recognition treatment. Which items do not qualify for this treatment?

A

“Things on paper”

inventory, stock, securities, partnership interests, goodwill, etc.

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29
Q

Gains on like-kind exchanges qualify for non-recognition treatment. Which items do qualify for this treatment?

A

Real property (land & building) & Personal property (M&E)

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30
Q

What makes real property & personal property qualify for nonrecognition of a gain during a like kind exchange?

A

Real property = does NOT have to be same “general” use

Personal property = must be same “general” use

31
Q

If you swap an apartment building for an office building during a like-kind exchange and realize a gain, is that gain taxable?

A

No, gain would not be recognized because when you do a like kind exchange for Real Property, the property does not have to have the same general use.

32
Q

If you swap a computer for office furniture during a like-kind exchange and realize a gain, is that gain taxable?

A

Yes, because when doing a like kind exchange for personal property, the property must have the same “general” use in order to qualify for nonrecognition treatment of a gain.

33
Q

Are there any timing requirements to qualify for nonrecognition treatment of a gain during a like kind exchange??

A

Yes.

Must ID replacement property within 45 days of giving up old, and must receive it within 180 days, or when tax return is filed (whichever is first)

34
Q

During a like-kind exchange, assuming real property is exchanged, how could there be any taxable gain?

A

Boot + FMV of non-like-kind property received.

35
Q

If a like-kind exchange ends in realizing a loss, can that loss be recognized?

A

No, losses on like-kind exchanges are never recognized

think about the benefits of avoiding recognizing a gain, can’t take a loss if you’re allowed to omit gain

36
Q

How do you determine recognized gain on a like-kind exchange that qualifies for nonrecognition treatment, but includes boot received?

A

Lesser of:

  1. ) Boot received
  2. ) Realized gain

= Recognized gain

37
Q

On installment sales, when are gains taxable?

A

When cash payments are received.

Total expected GP / Total Price = GP%

GP% * Cash received = Taxable Recognized Gain

38
Q

If a loss is realized, it can not be recognized and should be “WRAP”‘d up and thrown away (not used). What does “WRAP” stand for?

A 
W= Wash Sales losses
R= Related Party losses
A= And
P= Personal losses
39
Q

What is a wash sale?

A

A wash sale occurs when a security is sold for a loss, and repurchased within 30 days before / after the sale date. (lots of buy/sell activity creating artificial losses)

40
Q

What time frame makes a wash sale loss disallowed?

A

Repurchase within 30 days after or before sale

41
Q

Can you recognize a related party loss?

A

Never. Related parties are family, or businesses you own 50% or more of

42
Q

Can you recognize a personal loss?

A

No, but some losses may qualify for the itemized deduction “Casualty & Theft Losses”

43
Q

According to the IRS, what is a capital / noncapital asset?

A

Capital asset = not used in trade or business

Noncapital asset = business used

*IRS different than GAAP

44
Q

What are the applicable tax rates for individuals who have LT capital gains?

A 
20% = Rich
15% = Average
0% = Poor

*these are reduced rates to incentive taxpayers to hold stock for more than one year in order to qualify as a long term capital gain

45
Q

What are the applicable tax rates for individuals who have ST capital gains?

A

ST cap gains are taxed as ordinary income (no reduced rate)

46
Q

What is the maximum capital loss an individual can take in a tax year?

A

$3,000 max deduction

47
Q

What are the carryback/forward rules for capital losses for individuals?

A 
Carryback = NEVER
Carryforward = FOREVER (no limit)
48
Q

What are the long & short term capital gain rates for Corporations?

A

There are no special/lower tax rates for C-corps on LT capital gains.

49
Q

How are net capital losses handled by corporations? And what are the rules for carrybacks/carryforwards

A

Net capital losses can only be used to offset capital gains.

Carryback = 3 years
Carryforward = 5 years
50
Q

Section 1231, 1245, & 1250 relate to what types of assets?

A

Business used assets (PP&E)

*noncapital assets according to IRS

51
Q

LT capital gains for non-capital assets are treated:

A

By allowing lower/special rates (20%, 15%, 0%) (does not apply to C-corps as these would be normal rates) (M3)

52
Q

How are ordinary, noncapital losses treated? (net section 1231 losses)

A

Full deductible against ordinary income.

The assumption is there was not enough depreciation taken during the life of the asset, so you are now catching it up with a loss

53
Q

If you sell a section 1245 asset (M&E used in a business) at a gain, how is that gain treated?

A

Recapture all accumulated depreciation as ordinary income.

(The assumption is you took too much depreciation expense in prior years which you received the benefit for. After now selling the asset at a gain, the IRS is making you take back that depreciation you used in the past as income)

*recapture the lesser of the gain or all accum. depreciation on asset

54
Q

If you sell a section 1250 asset (Real Property used in a business) at a gain, how is that gain treated?

A

Recapture only that portion of depreciation taken that is in excess of straight line as ordinary income.

Remaining portion is treated as a capital gain. (good for corporation since they can use to offset capital losses).

See example in M3 for further details.

55
Q

What portion of a 1231 gain will be treated as a capital gain that can be offset with capital losses?

A

Sales Price - Original Cost

  • the ordinary income portion of the gain will be depreciation recapture, and the rest is treated as capital gain
  • interesting part about this concept is that you are able to take a “capital gain” on a “noncapital asset”
56
Q

Are in-laws related parties according to the IRS?

A

NO

57
Q

How are related party gains treated for tax purposes?

A

Fully taxable (losses are not allowed)

58
Q

What are the exceptions to recognizing a capital gain on a sale between related parties?

A
  1. ) Sale from husband to wife (basis is just transferred)

2. ) Sale to an entity you own 50% or more of (selling it to yourself) (treated as ordinary income)

59
Q

How are capital losses treated on a sale between related parties?

A

WRAP them up and throw them away!

Loss is disallowed.

60
Q

If you buy something from a related party, what is your basis?

A

Same as gift tax rules.

Basis is determined at the time of sale (minimize gains / losses)

61
Q

What is the treatment of below market loans, imputed interest from the perspective of the lender?

A

Any forgone interest must be reported as interest income.

The borrower can deduct the interest expense, even if it was not paid.

62
Q

What is the threshold to not imput interest on below market loans?

A

If loan is under $10k, deemed as de mimimus and interest does not need to be imputed

63
Q

What is the half year convention, and when would you use it?

A

Half year convention = treated as having been placed in service/disposed of at the midpoint of the year (only entitled to 50% annual depreciation)

*Applies to personal property only (M&E)

64
Q

What is the mid-quarter convention, and when would you use it?

A

Mid quarter convention = treated as having been placed in service in the last quarter of the year

*Applies if 40% of acquisitions occurred in last quarter of the year (only applies to personal property)

65
Q

What is the mid-month convention, and when would you use it?

A

Mid month convention = One half month is taken in the month the property is placed into service

  • Applies to real property (land & building).
  • rationale is that real property is usually very expensive, so need very accurate depreciation (half/mid quarter convention wouldn’t be accurate enough)
66
Q

What is the dollar limit for Section 179 for new/used personal property?

A

$510,000 limit for one asset.

Maximum amount is reduced dollar for dollar once property placed in service exceeds $2,030,000.

67
Q

What is bonus depreciation?

A

Additional depreciation expense for qualified property placed in service during the current year

(only applies to brand new assets)

(only can take bonus depreciation in first year in service)

68
Q

What are the bonus depreciation amounts for each tax year?

A

2015 - 2017 = 50%
2018 = 40%
2019 = 30%

69
Q

How is total depreciation calculated (including s. 179, MACRS, bonus, etc)

A 
Purchase Price
(Section 179)
(Bonus Depreciation)
(MACRS)
= Adjusted cost basis
70
Q

What is depletion?

A

Depletion is the reduction in the number of natural available resources (timber, minerals, oil, and gas).

71
Q

What are the different methods of depletion?

A
  1. ) Cost depletion (GAAP)

2. ) Percentage depletion (non-GAAP, tax only)

72
Q

What is the amortization period for goodwill according to the IRS?

A

15 years - straight line

73
Q

What is the amortization period for start up costs according to the IRS?

A

$5,000 deduct immediately, rest amortized over 180 months

REG (6 decks)

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