R4 Flashcards
Real Property
buildings and land
Personal Property
property that is not real property
Capital Assets
personal automobile of taxpayer furniture and fixtures in home stocks and securities real property that is not for business use interest in a partnership goodwill of a corporation real property held for investment
Noncapital Assets
Section 1231 Assets
Section 1245 and 1250 assets
inventory
accounts receivable and notes receivable
Amount Realized
Cash received
Assumption of debt by buyer
Property received at FMV
Services received at FMV
Adjusted Property Basis
cost + capital improvements - accumulated depreciation
Gifted Property Basis
- normally rollover basis
- FMV lower than basis
- *FMV for loss
- *basis for gain
- *inbetween is no loss or gain
Holding Period for Gift
*recipient will assume the donor’s holding period unless FMV was lower (date of the gift)
Inherited Property
- FMV at date of death
- alternative valuation date of 6 months
- *earlier of
1. 6 months
2. date of distribution
Holding Period for Inherited Property
ALWAYS long-term
Gains that are Excluded/Deferred
H omeowner's exclusion I nvoluntary conversions D ivorce property settlements Exchange of like-kind items I nstallment sales T reasury and capital stock transactions
Losses that are Not Allowed
W ash sales (to extent of wash)
R elated party transactions
a nd
P ersonal losses
Homeowner’s Exclusion
Single: 250,000 Joint: 500,000
- Both must meet the USE test but only one has to meet the OWNERSHIP test
- one spouse still may be able to take the 250,000 if the other is precluded
- 500,000 can apply up to two years after death of spouse
Nonqualified Use Provision of Homeowner’s Exclusion
- if home is used for nonqualified uses (renting), the portion of the nonqualified use out of the total time is multiplied by the exclusion and deducted from it
- if the home was the principle residence for two years, the first five years after when used for nonqualified use do not impact the exclusion
Special rule involving homeowner’s exclusion and deceased spouse
Spouse can receive 500,000 up to two years after death
Is the Homeowner’s Exclusion renewable?
Yes, every 2 years
Involuntary Conversions
- gain is recognized to the amount of unreinvested amount
- basis = basis of new property (cost) - deferred gain
- amount realized = insurance proceeds - basis of old property
- losses are recognized
Divorce Property Settlements
- no gains are recognized
* basis is the carryover basis
Exchange of Like-Kind Business
- used on all items except: inventory, stock, securities, partnership interests, real property in different countries
- gain when boot is received or any other nonlike-kind items (including COD)
- basis = FMV of new property - deferred gain + deferred loss
Installment Sales
*gain recognized is amount of gross profit in each payment whether it is a down payment or a normal payment
Treasury and Capital Stock Transactions
- sales of stock by corporation
- repurchase of stock by corporation
- reissue of stock
Wash Sales
- losses are disallowed to extent that sales are repurchased/sold within 30 days BEFORE or AFTER date of sale
- part of the loss may be recognized if the wash is not for 100% of the old stocks
Related Party Transactions
- related individuals
- entities that are more than 50% owned by individuals, corporations, trusts and/or partnerships
- in-laws are outlaws and are not related parties
- basis = same as gift EXCEPT
- *holding period starts on the date of receipt
Personal Loss
no deduction allowed
Individual Capital Gain and Loss Rules
long-term = capital rates short-term = ordinary income
*all losses and gains can offset each other
$3,000 offset of ordinary income for losses for individuals
Individual Net Capital Loss Carryover Period
*maintains character and is carried forward unlimited
Corporation Capital Gain and Loss Rules
- no special income type for capital gains or losses
- no $3,000 offset
- capital loss carryovers are all short-term
Corporation Net Capital Loss Carryover Period
Carryback: 3
Carryforward: 5
MACRS Rules - Property Other than Real Estate
- no salvage value
- mid-year convention
- mid-quarter convention if more than 40% of personal property is placed into service in fourth quarter
MACRS Rules - Real Estate Property
Residential Real Estate - 27.5 years (straight-line)
Nonresidential Real Estate - 39 years (straight-line)
*both use MID-MONTH convention
Section 179 Expense
- limited to $25,000
- reduced dollar for dollar for cost over $200,000
- cannot be taken in a year that had a loss or in a year where it would create a loss
Depletion
- preference item for AMT
* Percentage Depletion is used rather than Cost Depletion
Amortization of Intangibles
Tax = 15 years
Business Organization Start-up Costs
$5,000 reduced dollar for dollar over $50,000
*rest is amortized over 180 months
1231 Assets
Best of both worlds:
1. capital gains
2. ordinary losses
Subject to 1245 and 1250
Section 1245 Assets and Section 1250
Section 1245
- nonreal-estate business property
- amount of ordinary income recapture = lesser of realized gain or depreciation taken
Section 1250
- real-estate business property
- amount of ordinary income recapture = lesser of realized gain or depreciation in excess of straight line
General Rules for Formation of Partnership
*no gain/loss recognized for contributions
- income recognized based on FMV of interest for services rendered
- gain recognized for liability given up in excess of basis of property contributed (basis would be 0)
Basis of Contributing Partner
Basis of contributed property
+ liability taken on by the incoming partner
+ services at FMV
Partnership’s Basis for Contributed Property
NBV + gain recognized
Partnership Operations Partner Basis Formula
B eginning capital account A dditions (income) S ubtractions (losses and withdrawals) E nding capital account \+ liabilities = basis
Basis of Partner in Partnership
Capital Account + Liabilities
Outside Basis
basis partner has in their ownership interest
Inside Basis
basis the partnership has in the assets it owns
Partnership Tax Year
*calendar year or fiscal year so long as deferral is no longer than 3 months
Ways a Partnership can Terminate
- operations cease
- 50% or more of the total partnership interest is sold or exchanged within a 12 month period
- less than 2 partners
Partnerships and Related Party Losses
*a partner with an over 50% interest will be disallowed a loss and must add it back in when calculating distributive income
Effects of a Termination
- assets are distributed to partners
* assets are recontributed to the new partnership
Tax Losses for Partners
*limited to basis (amount at risk)
Carryforward of Partnership Losses
*indefinite, just can’t make basis go below zero
Guaranteed Payments
- deducted to arrive at net business income
- income to receiving partner
*similar to salary or interest expense
Retirement Payments
- ordinary income
* deductible
Organizational Expenditures and Start-Up Costs
$5,000 reduced dollar for dollar over $150,000
*rest is amortized over 180 months
Are syndication costs deductible for partnerships?
No
Which items are only reported on the 1065?
Business income and business expenses
Where is net business income/loss and guaranteed payments reported?
1065, K, and K-1
Nonliquidating Distributions from Partnership
- gain is recognized only if cash is received in excess of basis
- basis in property = carryover but is limited to the partner’s basis
Liquidating Distributions from Partnership
- zero to get out
- gain is recognized when cash exceeds partner’s basis
- decrease basis in order: cash, ordinary income, capital
Sale of Partnership Interest
Beginning Capital Account
% Income
+ liabilities
= basis
=gain/loss
*exception = hot assets
Hot Assets
- unrealized receivables
- appreciated inventory
- recapture income
Retirement or Death of Partner
*payments for the interest result in capital gain/loss
LLC individuals are called what?
members
What happens if an LLC only has one member?
it is considered a disregarded entity and is treated as a sole proprietorship
Two taxes on estates
- estate income tax
2. estate tax
Unified Estate and Gift Tax
credit = $2,081,800
applicable amount = $5,340,000
Distributable Net Income (not adjusted)
Gross Income - deductions \+ tax exempt INTEREST - capital gains from corpus =DNI
Deductions allowed for DNI
- carrying on a trade or business
- production of income
- contributions to charity so long as it is provided in the will (unlimited)
Income Distribution Deduction
*determines the amount that will be taxable
Limited to the lesser of
1. DNI (LESS TAX EXEMPT INTEREST)
2. Distribution
Annual Estate Income Tax
Form 1041
- required when annual income exceeds $600
- year can be calendar or fiscal starting with date of death
- exempt from making estimated payments for first two years
Annual Trust Income Tax
Form 1041
*year must be calendar (TRUST you can remember this)
Simple Trusts
- only distribute earnings of current income
- no charitable contributions
- $300 exemption in arriving at its taxable income
Grantor Trusts
grantor retains control over trust assets
Complex Trusts
- distribute current income and principal
- charitable contributions
- $100 exemption in arriving at its taxable income
Estate Tax
Form 706 *must be filed within 9 months after death *can use alternative valuation date of 6 months Included in Gross Estate: *incomplete gifts *insurance proceeds *revocable transfers *property entitled to be received
Estate Deductions
Nondiscretionary
- medical (if not deducted on income tax return)
- administrative costs (if not deducted on 1041)
- outstanding debts
- claims
- funeral costs
- certain taxes
Discretionary
- unlimited charitable deduction
- unlimited marital deduction
Deceased Spouse’s Unused Exclusion
carries over to the surviving spouse
Credits to Reduce Estate Tax
- foreign tax credit
2. prior transfer taxes on gifts
Gift Tax
Form 709
*paid by the person giving the gift
Annual Exclusion for Gift Tax
$14,000 per person per year
Unlimited Exclusion for Gift Tax
- DIRECTLY to college (tuition only)
- DIRECTLY for medical care
- spouse
- charity
Gifts - Present vs. Future
Gifts must be complete and present in order to qualify for the exclusion
*revocable, reversions, remainders, without ascertainable value, conditional
Generation-Skipping Transfer Tax
- two or more generations below
* separate tax that may be imposed in addition
Holding Period for Gift Property
- normally carryover of holding period of donor
* EXCEPTION: when FMV is used for loss basis, the holding period is the date after receipt
Required Time Period to hold investment for DRD
45 days
