R4 Property Taxation

Question 1

What is the tax treatment of capital gains / losses for individual TP?

Answer 1

Net capital losses are deductible up to a max of $3K per year against non-capital income. Any excess can be carried forward.

Capital gains are fully taxable (but at lower tax rates)

Holding period

ST = one year or less
LT = more than one year

Question 2

In general how is the donee’s basis of a gift determined? How is the holding period determined?

Answer 2

1. In general, the donee’s basis of a gift is the same as the donor’s basis. The carryover basis may be increased for gift tax paid on appreciation of the gift.
2. The HP includes the donor’s HP unless basis becomes FMV, then HP starts at date of gift.

Question 3

What is the basis of a gift for determining gain or loss in a sales transaction?

Answer 3

1. For purpose of calculating a gain on sale, the gift basis to use is the donor’s rollover basis.
2. For purposes of calculating a loss on sale, the gift basis to use is the FMV at the date of the gift.
3. If the sales price is between the donor’s rollover basis of the gift and the FMV of the gift at the date of gift, no gain or loss is recognized on a sale.

Question 4

What is the gift basis used to calculate depreciation?

Answer 4

The basis for depreciation purpose (if applicable is the lesser or:

1. The donor’s adjusted basis at the date of the gift or
2. The FMV at the date of the gift.

Note: Depreciable basis is determined separately from gift / loss basis

Question 5

In general how is the basis of inherited property determined?

How is the HP Determined?

Answer 5

The basis of inherited property is the lower of:

1. FMV at date of death

OR

2. FMV at alternate lower valuation date (if elected) which is: (a) 6 months from date of death or (b) disposal date (if disposed of less than 6 months from date of death)

The HP is automatically deemed L-T for all inherited property regardless of how long the deceased owned the property.

Question 6

When is a gain not taxed?

HIDE IT

Answer 6

1. Homeowner’s exclusion
2. Involuntary Conversions
3. Divorced property settlement
4. Exchange of LKE / investment assets (tangible)
5. Installment sale
6. Treasury and capital stock transaction (by corporation) Gains are not taxed when you can “Hide it”

Question 7

ID the major tax provisions of involuntary conversion of property?

Answer 7

Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within 2 years for personal property or 3 years for business property.

A realized gain exists when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain:

1. Gain not recognized if proceeds reinvested in qualified replacement property
2. Basis is cost of replacement property less any gain no recognized
3. Losses are recognized in involuntary conversion
4. Basis is replacement cost when losses are recognized

HP includes period that orignal property was held

Question 8

ID the criteria for the exclusion provision on the sale of personal residence.

Answer 8

1. TP must have owned and used the property as the principal residence for 2 years or more during the 5 year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable (sales / periods after 2008)
2. Either spouse for a joint tax return must meet the ownership requirement and both spouses must meet the use requirement with respect to the property.
3. TP may be eligible for a partial (on a prorata basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstance, when claimed within the pervious 2 years or fails to meet the ownership and use requirements
4. No age requirements
5. No rollover to another house is required
6. Renewable can be utilized more than once.

Question 9

Name the criteria for a classification as a like-kind exchange.

Answer 9

Like-kind exchange criteria:

1. Tangible real or personal property and
2. Used in trade or business
3. Held for investment (except inventory, stock, and securities)

Question 10

In a like-kind exchange, what is the basis of the property received?

Answer 10

Basis of property received in a like kind exchange is as follows:

FMV of like kind property received - Deferred Gain + Deferred Loss

Question 11

Identify the nondeductible losses

WRAP up these losses bc they are not deductible.

Answer 11

Wash sale loss

Related party transactions

And

Personal Loss

Question 12

What is the tax treatment given to wash sales?

Answer 12

1. Losses are disallowed if the same security is bought within 30 days before or after the sale
2. The disallowed loss increases the basis in the property (security)
3. Gains are taxable

Question 13

What is the tax treatment for sales to related parties?

Answer 13

1. No deduction is allowed for losses on sales to related parties
2. On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss

Question 14

What are the corporate capital gain / loss rules for C corporation?

Answer 14

Net capital gains (LT & ST)

1. corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
2. Section 1231 gains are entitled to capital gain treatment

Net capital losses (LT and ST)

1. Corporate net capital losses are carried back 3 years and forward five years as ST capital loss
2. They are deducted from capital or Section 1231 gains

Question 15

For assets acquired after 1986, what is the recovery method for 3, 5, 7 and 10 year property (MACRS)?

Answer 15

200% declining balance - Estimated salvage value is not considered

Notes:

1. TP may choose SL depreciation in lieu of 200% declining balance
2. 20-year property uses the 150% declining balance method

Question 16

What is the half-year convention?

Answer 16

6 months of depreciation is taken in the year of acquisition and the year of disposal.

Note: When SL depreciation is elected, the HY convention is still applicable.

The method of depreciation used must be used for all personal property acquired that year in a given property class.

Question 17

What is the mid-quarter convention?

Answer 17

MQ convention replaces the HY convention if greater than 40% of a TP’s property (other than real property) is placed in service during the last 3 months of a tax year.

The mid-quarter convention treats all personal property placed in service during any quarter of the tax year as being placed in service on the mid-point of the quarter.

Question 18

What is the mid-month convention?

Answer 18

Mid-month convention is used for calculating depreciation of real property (27.5 year residential rental real estate and 39 year nonresidential real property)

The real property is treated as place in service in the middle of the month of acquisition. When using the mid-month convention, real property is also treated as disposed of during the middle of the month of acquisition.

Question 19

What is the expense deduction (Sec. 179) in lieu of depreciation?

Answer 19

In 2014, $25,000 of acquisition cost of personal property used in a trade or business may be deducted in any one year.

Limitations:

1. Reduced $1 for each $1 of qualifying property placed in service in excess of $200,000
2. Deduction is not permitted when a net loss exist or if the deduction would create a net loss (limited to taxpayer’s taxable income from trade or business).

Question 20

What are section 1231 assets?

Answer 20

Generally, depreciable or real property used in trade or business and held over 12 months.

1. Net all section 1231 gains and losses.
2. If gain > losses, treat the net amount as LTCG
3. If loss > Gains treat the net amount as ordinary losses

Question 21

What is the tax treatment of section 1245 assets?

Answer 21

1. Recapture all accumulated depreciation as ordinary income under section 1245
2. Any excess gain is section 1231 gain

Question 22

Identify the tax treatment given Section 1250 asset for individuals.

Answer 22

An amount equal to the lesser of

1. The recognized gain on the sale of the section 1250 asset, or
2. The Accumulated Depreciation on the Section 1250 asset, is taxed at a maximum rate of 25%. Any gain in excess of the amount taxed at 25% is taxed at the preferential rate of 0, 15. 20%

Question 23

What is the Section 291 rule for corporation?

Answer 23

Amount recapture as ordinary income on the sale of real property under Section 291 is equal to 20% of the lesser of the recognized gain or the accumulated depreciation. Any gain in excess of the amount recognized as ordinary income is allowed capital gain treatment under Section 1231.