R4 - big topic 1/3 - property tax

Question 1

HIDE IT - E

Answer 1

Exchange of Like-kind Business/investment Assets (tangible)

1. “Like-kind” - property used in the trade or business or held for investment (except inventory, stock, securities, partnership interests, and real property in different countries)
2. two main things
   a) gain when boot received
   Amount realized 40,000
   - adjusted basis (25,000)
   = realized gain 15,000

received cash = 5,000 (Core formula) 
realized gain (15,000) = deferred gain (10,000) + recognized gain (5,000, taxable) **与收到的property fmv无关
**if loss - realized. loss is never recognized (not tax deductible) 

b) basis rules - to find the new basis (core formula)
New FMV of like-kind property received - deferred gain + deferred loss = new basis （与recognized gain 5000 无关, 与boot也无关）

• ** Recognized gain (taxable) = lesser of realized gain or boot received
• ** Loss NEVER recognized (not tax deductible)
• ** Given boot will not involve in calculating deferred gain and loss.

Question 2

HIDE IT - I&T

Answer 2

Installment Sale

1. recognize gain when cash is received.
2. Gross profit = sale - cogs
   Gross profit % = gross profit / sales （%是关键）
   earned revenue (taxable) = gp% x cash received

Treasury Stock 
following are tax free 
- sales of stock by corporation 
- repurchase of stock by corporation
- reissue of stock

Question 3

Losses - WRaP -“W”

Answer 3

“W” Wash Sale loss - when a security (Stock or bond) is sold for a loss and is repurchased within 30 days before or after the sale date.

-30 days |sale day| + 30 days = any loss in between is not tax deductible.

• the loss on wash sale is disallowed for tax purposes.
• basis of new security = new purchase price + disallowed loss

Question 4

Losses - WRaP - “R”

Answer 4

“R” Related Party Transactions -> not a arm-length transaction.

Capital Gains
-> capital gains taxes are imposed on all sales of nondepreciable property between all related parties except: husband and wife, and individual and 50%+ controlled corp

Capital Losses -> sales to relative price < original owner basis
disallowed between related parties
Rules? same as gift rule
Roll over basis (not recognized between relative loss) -> sale price decided the basis.

Question 5

Losses - WRaP - “P”

Answer 5

Personal loss - No deduction is allowed for the loss on a nonbusiness disposal or loss.

Question 6

Capital Assets

Answer 6

Capital assets include property (real and personal) held by the taxpayer for investment - such as

1. Personal automobile of the taxpayer
2. Furniture and fixtures in the home of the taxpayer
3. Stocks and securities of all types (except those held by dealers)
4. Personal property of a taxpayer not used in a trade or business
5. Real property not used in a trade or business
6. Interest in a partnership
7. Goodwill of a corporation
8. Copyrights, literary, musical, or artistic compositions purchased PURCHASED
9. Other assets held for investment

capital assets是为了investment， capital asset不流动 很稳定

Question 7

I. Definitions

Real Property, Personal Property, Capital Assets, Noncapital assets

Answer 7

1. real property - land and all items permanently affixed to the land (land, building, and paving)
2. Personal Property - all property not classified as real property (machinery, equipment, and automobiles)
3. Capital Assets - include property (real and personal) held by taxpayer for INVESTMENT
   - personal automobile of individual taxpayer
   - furniture and fixtures in the home
   - stocks and securities of all type (not held by dealers)
   - personal property not used in trade or business
   - real property not used in trade or business
   - interest in a partnership
   - goodwill of a corp
   - copyrights, literary etc PURCHASED
4. Noncapital Assets
   - inventory, held for sale in the ordinary course of business
   - depreciable personal property used in trade and business (Section 1231, 1245, 1350)
   - accounts receivable in business
   - Copyright, literary held by the ORIGINAL artist
   - treasury stocks

Question 8

II. Core formula and tax treatment

- Amount Realized

Answer 8

Amount Realized
(Adjusted Basis of asset sold)
= Gain or Loss (realized, not recognized)

Amount Realized

1. Cash received (Boot)
2. assumption of debt by buyers (Boot)
3. Property RECEIVED at FMV
4. Service RECEIVED at FMV
5. (Selling expenses)

Question 9

II. Core formula and tax treatment

- Adjusted basis (Three types)

Answer 9

Three types of adjusted basis (purchase, gift, Inherited)

1. purchased - Basis = cost
   the cost of property includes all amounts to purchase the property, prepare the property for use, and place the property into service.
   ** add - basis for capital improvement
   ** reduce - accum. depreciation
2. gift (rolling over cost)
   rollover basis - keep using the donor’s basis
   Exception - lower FMV at date of gift
   Adjusted Basis for gain and loss - sales price closer
   if in between, no gain and loss
3. inherited
   GR basis = Data of death FMV (Step up/down = match to the FMV at the date of the death)
   Exception - Alternate Valuation Date

Elect:

• Death FMV
• Alternate date (earlier of 1) distribution date FMV or 2) 6 months after death FMV)

**Inherited = automatically long-term property

Question 10

II. Core formula and tax treatment

- Individual Capital gain and loss rules

Answer 10

INDIVIDUAL 3 things

1. classification
   Long term - holding more than one year; tax rate 20%, 15%, and 0%
   Short term - one year or less, rate rate = treated as ordinary income
2. deduction and carryback/forward
   Deduction amount - $3,000 max capital loss and can offset other types of ordinary incomes
   - Excessive individual capital loss: carryback: NO; Carry forward: UNLIMITED
3. Netting Procedures
   meh

Question 11

II. Core formula and tax treatment

- Corp Capital Gain and loss rules

Answer 11

Net Capital Gain (Corp - LT and ST)
added to ordinary income and taxed at the regular tax rate.
** Section 1231 gains are entitled to capital gain treatment.

Net capital loss (corp - ST and LT)
First of all - net capital loss can ONLY set off Capital Gin or section 1231 gain.
carry back - 3; carry forward - 5

• *Section 1231 gain = Capital gain
• *Section 1231 loss = ordinary loss

Question 12

II. Core formula and tax treatment

- Capital gain and loss summary

Answer 12

individual capital loss = $3,000 deduction on ordinary income, no carry back, unlimited carry forward

Question 13

II. Core formula and tax treatment

- Gain and Losses

Answer 13

amount realized
- adjusted basis ( three types)
= Gain or Loss

Gain (HIDE IT)

• Homeowner exclusion
• Involuntary conversion (destruction, theft,
• Divorce property settlement
• Exchange of like-kind business
• Installment sales
• Treasury and capital stock transaction (by corp)

Loss (WRaP)

• Wash sale
• Related Party Transaction
• Personal loss

Question 14

Gain (HIDE IT) - H

Answer 14

Homeowner exclusion - sale of taxpayer’s PERSONAL PRINCIPAL Residence
Deduction amount: $500,000 MFJ and Widow (within 2 years of spouse death) and $250,000 Single, MFS, HoH

• *Principal residence = two years or more during 5 years period
• • eligible for a partial exclusion if due to change in place of employment, health, unforeseen circumstances.
• • no age requirement
• • no rollover to another house is required
• • renewable

Question 15

Gain (HIDE IT) - I

Answer 15

Involuntary Conversions (Destruction, theft, condemnation)

Gain = taxable (recognized to the extent of the unreinvested amount)

Amount received - adjusted basis = Realized Gain
reinvested - old property adjusted basis = unrevinested (recognized, taxable)

Realized gain = unreinvested (recognized, taxbale) + invested gain (deferred)

new basis = FMV received/reinvested - Deferred gain + deferred loss

Loss - losses would be recognized. the loss is recogized only in calculating the new basis.

**time line - reinvestment period
Personal Property - 2 years from year end
Business Property -3 years from year end

Question 16

The ultimate new basis formula

Answer 16

new basis = FMV received/reinvested - Deferred gain + deferred loss

Question 17

Gain (HIDE IT) - D

Answer 17

Divorce property settlement

the lump sum payment or property settlement for divorce, Non taxable event.

Question 18

III. Depreciation

Answer 18

depreciation - an annual allowance given to a trade or business for exhaustion, wear and tear.

**MACRS - NO Salvage value

3 rules in here -
1. MACRS (Modified Accelerated Cost Recovery System) - Property other than Real Estate (Machinery and Equipment)

• half-year convention (in general)
  placing during the taxable year treated as placed in service at the midpoint of the year.
• mid-quarter convention
  if more than 40% of depreciated personal property is placed in service in the last quarter of the year, mid quarter convention must be used.

2. MACRS Depreciation Rules
   - Residential Rental Property (27.5 years, straight line)
   - Nonresidential rental property (39 years, straight line)
   - Mid Month Convention
   1/2 of the month (property in place) + normal month + 1/2 of month (property disposal)
3. Expense Deduction in Lieu of Depreciation

Question 19

IV. Depletion

Answer 19

nature resources

depletion - Two methods
1. Cost Depletion (GAAP)
Remaining basis / remaining number of recoverable units = rate
Rate * unit sold

2. percentage depletion (non-GAAP)
   limited = 50% of taxable income from the well or mine
   limited = 5 - 22% from mineral or substance

Question 20

V. Amortization

Answer 20

1. INTANGIBLE ASSETS - 15 years ( or 180 months) amortization starting with the month of acquisition.

**intangible assets: goodwill, licenses, franchises, and trademarks
GAAP rule -> no amortization, just impairment test

2. ORGANIZATIONAL COST and START COST - 5,000 deduction and 15 yrs (180 months) amortization

GAAP rule -> organizational and start up costs are just pure expenses.

Question 21

VI. Section 1231, 1245 and 1250 Assets

Answer 21

noncapital assets -> depreciable personal property used in business and trade (Section 1231, 1245, and 1250)

Section 1231 - depreciable personal and real property used in the taxpayer’s trade or business and held for over 12 months

Section 1245 - personal property used in trade and business for over 12 months

Section 1250 - real properties used in a trade or business over 12 months.

Question 22

Section 1231 depreciation Recapture rule

Answer 22

1. Section 1231 loss = ordinary loss (no limitation) = sales price - adjusted basis

2. Section 1231 Gain = two levels 
level one - Section 1231 Capital gain
Sales price 
- (Original Purchase price) 
= Section 1231 gain 

level two - Ordinary gain = gain EXTENT to the Accum. depr. 
Original purchase price 
- NBV
= Accumulated Depreciation 
= Ordinary income 

3. Yes Section 1231 gain and section 1231 loss can be NETTED!!

Question 23

Section 1231 depreciation recapture rule - EXAMPLE

Answer 23

Step 1, Calculate the gain and loss (business as usual)
Amount realized - Adjusted Basis = realized Gain/loss
**adjusted basis = original purchase price - accum. depr.

Step 2 a, if loss, then loss = ordinary loss. unlimited offset income

Step 2 b, if gain, try to distinguish the ordinary gain from Section 1231 capital gain.
KEY”:
Sales Price - Original Purchase Price = 1231 capital gain

Purchase Price - NBV = Accu. depr = ordinary gain
sometimes gain cannot extent to the accu. depr. be careful.

Sales price = 4,000
cost = 6,800
accu. depr. = 3,200
NBV (adjusted basis) = 6800 - 3200 = 3600

realized gain = 4,000 - 3600 = 400 gain
Section 1231 gain = 4,000 - 6,800 = no gain
400 is all ordinary gain.

-----------------
sales price = 2600 
cost = 2500
accu. depr = 500
NBV (adjusted basis) = 2500 - 500 = 2000

realized gain = 2600 - 2000 = 600
1231 capital gain = 2600 - 2500 = 100 capital gain
500 is ordinary gain.

------------------
sales price = 500 
cost = 15000 
accu. depr. = 13000
nbv (adjusted basis) = 15000 - 13000 = 2000

sales price - nbv (adjusted basis) = 500 - 2000 = (1500)
all ordinary loss, fully deductible, unlimited

Question 24

the lesser of realized gain of $3,000 or boot received of $3,500

Answer 24

Gain/Loss Realized:
Amount realized
=Fair market value of new auto + Boot received - Adjusted basis of auto given up
=$16,500 fair market value new auto + $3,500 fair market value of trailer - $17,000
adjusted basis of the old auto ($35,000 cost - $18,000 accumulated depreciation)
=$3,000 gain

Gain/Loss Recognized:
Gain recognized
=$3,000 (the lesser of realized gain of $3,000 or boot received of $3,500)

Basis of New Property:
New basis
=Adjusted basis of property given up + Gain recognized - Boot received
=$17,000 + $3,000 + $0 - $3,500
=$16,500

Question 25

新题型

Answer 25

liabilities cancelled on MY things = boot received
liabilities assumed on new things = boot given

但是注意 当calculate new basis的时候 不考虑boots 只考虑deferred gain or deferred loss.

Liability in sale 被cancel的就是gain

Question 26

A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago. The taxpayer’s landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer’s lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord’s offer, the gain or loss would be which of the following?

Answer 26

A capital asset which is sold or exchanged more than one year after the date of acquisition will generate either a long-term capital gain (if the capital asset is sold at a price greater than acquisition cost) or a long-term capital loss (if the capital asset is sold at a price less than the acquisition cost). In this question, the lease-hold interest, which is a capital asset, was acquired more than a year ago, and the basis (acquisition cost) in that capital asset is -0-. So, the receipt of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain.

Question 27

what is 1231

Answer 27

1231 Assets are depreciable personal property and real property used in a business and held for over 12 months.